Taxation of Government Grants

By | December 2, 2015

Alignment of provisions relating to taxation of Government Grants with the provisions of Income Computation and Disclosure Standards (ICDS)

Sub-section (2) of section 145 of the Income-tax Act provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. The Central Board of Direct Taxes (CBDT) notified ICDS-I to ICDS-X vide Notification No.S.O. 892(E) dated 31st March, 2015 after wide public consultations. The ICDS-VII relating to Government grants provides that all Government grants except relating to depreciable asset shall be recognised as income in accordance with the provisions of the said ICDS.

Treatment of Government grants relating to acquisition of an asset:-

The existing provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act already contained the guidance for treatment of Government grants relating to acquisition of an asset.

Which read as Follow :-

Section 43 Explanation 10.—Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee :

Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.

Treatment of other Government grants (Other than relating to acquisition of an asset):-

However, there was no specific guidance available under the provisions of the Income-tax Act for treatment of other Government grants. During the public consultations for ICDS, the stakeholders suggested that in order to avoid any future controversy in this matter, there should be specific provision in the Income-tax Act for treating these Government grants as income. The Accounting Standard Committee, which drafted the ICDS, has also examined the suggestions/comments received during public consultations and suggested that the issue of legislative amendment for bringing certainty in this matter may be examined. In order to avoid any future litigation and controversy in this matter, the definition of income under clause (24) of section 2 of the Income-tax Act has been amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act

As mentioned in Press Release dated 5th May, 2015 (see Note Below) , the amended definition of income shall not apply to the LPG subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried on by him.”.

Applicability:- This amendment takes effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years.

Source : Extract from  EXPLANATORY NOTES TO THE PROVISIONS OF THE FINANCE ACT, 2015 issued by CBDT on 27.11.2015 and Section 43 of Income Tax Act, Press Information Bureau


Press Information Bureau
Ministry of Finance 05-May, 2015
Provision in the Finance Bill, 2015, will not Affect the LPG Subsidy and Other Welfare Subsidies Received by Individuals

Certain doubts have been raised in a section of the media about the applicability of the official amendment moved in the Finance Bill, 2015 in the Lok Sabha on 30th April, 2015 with respect to definition of ‘income’.

Sub-section (2) of section 145 provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. The Central Board of Direct Taxes (‘CBDT’) notified ICDS on 31.3.2015 vide Notification number S.O. 892 (E) after wide consultations with the stakeholders for which the draft was placed in the public domain. The ICDS is applicable to persons having income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and following Mercantile System of Accounting. This is not applicable to individuals not having any income chargeable under the head “Profits and gains of business or profession” and receiving LPG subsidy or any other subsidy which is for the welfare of the individual. The Finance Bill, 2015 proposes to align the definition of Income with that provided in ICDS for this purpose. To restate the position, the provision in the Finance Bill, 2015, will not affect the LPG subsidy and other welfare subsidies received by individuals.

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