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Subsidy Tax!

Published on Mon, May 04,2015 | 22:12, Updated at Mon, May 04 at 22:19Source : |   Watch Video :

It’s turning out to be a summer of tax discontent! The Finance Bill, as passed by the Lok Sabha last week includes a surprise amendment, one that was not in the Finance Bill tabled earlier. The Government has decided to tax all central and state subsidies and grants. Menaka Doshi explains…


-       Definition of ‘income’ amended to include any subsidy or similar assistance given by Center / State/ Any Authority in cash or kind to a taxpayer

-       Except where such subsidy…is reduced from the actual cost of an asset

-       All such subsidies / benefits would therefore become taxable even if these are capital in nature.  

Source: BMR

Simply put – the definition of ‘income’ has been amended to include any subsidy, grant, waiver, cash incentive or similar assistance. This has been a vexed issue for long. And there have been judgments that determine whether a subsidy is a revenue or capital receipt and hence liable to tax or not. For instance, a sales tax subsidy, to encourage new capital investment, is a capital receipt and not liable to tax, whereas revenue subsidies are. Now this amendment brings both capital and revenue subsidies to tax! It’s counterintuitive – a subsidy is an incentive…and taxing it reduces its full benefit!  

Dinesh Kanabar, Founder & CEO, Dhruva Advisors
“It does. So what we are now saying is on the one hand the Government is giving you 100 and taking away 35 by way of taxes. There is actually a Supreme Court judgment in the case of Poni Sugars & Chemicals where the Supreme Court held that any subsidy has to be regarded in the light of the scheme for which it was received. And it went on to say that take for example if the purpose of the Govt was to develop a backward area, a state, to promote any industry etc…then all such grants are capital in nature and not liable to tax. What this amendment seems to do is to nullify a host of judgments - the Bombay High Court in the case of Reliance has held that any sales tax subsidy received is not capital in nature and not liable to tax - so there are host of decisions, all of those are sought to be overruled by this amendment. And therefore a third of what you get from the Government is being taken away by way of taxes.”

Mukesh Butani, Chairman, BMR Advisors
“All the Government is trying to do  through this amendment is to align the Income Tax law with the Tax Accounting Standards. The Tax Accounting Standards say if you receive a capital subsidy,  if it is identifiable against a particular asset, then your depreciation claim accordingly reduces. What the I-T amendment is saying is that if they are not identifiable, even if it is capital in nature, it will be liable to be taxed.”  

Opinion is divided on whether this will have a significant material impact on India Inc!

Mukesh Butani, Chairman, BMR Advisors
“If you look at it as a rationalisation measure the answer is no, because it more or less aligns with the definition under the Tax Accounting Standards. So I think that’s what the Government seems to have done, which is align. Now there could be situations in which capital subsidy, which cannot be identified under a particular head of capital asset, those will be liable to be taxed now under the new law.”

Dinesh Kanabar, Founder & CEO, Dhruva Advisors
“A number of assesses will get impacted. In Maharashtra there was a scheme for development of multiplexes and any such subsidy received for multiplexes was not liable to tax because it was a capital receipt - those  would now be liable to tax. Similarly sales tax subsidy is being granted routinely by all the states to promote capital investments and the subsidies range from between 50-100% of the capital investment made. All such subsidies will now be liable to tax as income. And this entire program of Make In India …which requires large scale industrialisation…will now be impacted as a result of this amendment.”

Besides the oddity that an incentive is being sought to be taxed, that it was quietly introduced in the Finance Bill and passed without debate has also disturbed tax experts!  To end with a twist – will this new subsidy tax also impact individuals? Will we have to pay tax on subsidised lpg cylinders???


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