Government Grants - The Chamber of Tax Consultants

Transcription

Government Grants - The Chamber of Tax Consultants
| SPECIAL STORY | Income Computation and Disclosure Standards |
CA. Zubin F. Billimoria & CA. Pooja Balachander
Income Computation and Disclosure Standard VII –
Government Grants
Introduction
This Income Computation and Disclosure
Standard (ICDS) deals with the treatment
of Government grants as applicable for
computation of income chargeable under
the head “Profits and Gains of Business or
Profession” or “Income from Other Sources”
and not for the purpose of maintenance of
books of account. The ICDS also recognizes
that Government grants may also be called as
subsidies, cash incentives, duty drawbacks,
waiver, concessions, reimbursements, etc.
However, it does not deal with Government
assistance other than in the form of Government
grants; and Government participation in the
ownership of the enterprise.
The transitional provisions provide that all the
Government grants which meet the recognition
criteria as per the ICDS on or after 1st April,
2015 shall be recognized in accordance with
this ICDS after taking into account the amount
of grants already recognized before 31st March,
2015.
On the other hand, Accounting Standard 12 (AS)
as notified under the Companies (Accounting
Standards) Rules, 2006 deals with the accounting
for Government grants.
Whilst the general principles under the AS and
the ICDS are broadly similar there are various
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subtle differences between the two as also the
fact that certain aspects are not specifically dealt
with in either one of them.
This article attempts to analyse the comparisons
as regards the AS together with the impact
which the ICDS could have on the computation
of taxable income, minimum alternate taxes and
deferred taxes.
Comparison with AS
The comparison can be analysed under the
following broad heads:
Grants in the nature of promoters’
contribution
The AS specifies that two broad approaches need
be followed in the accounting for Government
grants – the capital approach or the income
approach depending on the nature of the grant.
As per the AS, Government grants in the nature
of promoters’ contribution i.e. grants given
with reference to the total investment in an
undertaking or by way of contribution towards its
total capital outlay and without any expectation
of a repayment, are required to be credited
directly to shareholders’ funds. Under ICDS,
there is no specific mention of grant by way of
promoters’ contribution. However, the same gets
covered by a residuary category which requires
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| Income Computation and Disclosure Standard VII – Government Grants |
grants to be recognized over the period necessary
to match them with the related costs that they are
intended to compensate. Accordingly, the existing
practice of accounting for such Government
grants as a part of Capital Reserve may not be
permissible anymore for tax purposes.
It may be noted that as per Ind AS which would
be applicable from the financial year 2015-16,
Government grants are recognized as income
to match them with expenses in respect of the
related costs for which they are intended to
compensate on a systematic basis and are not
to be directly credited to shareholders’ interests.
Grants related to revenue
As per the AS, grants related to revenue are
recognized in the Profit and Loss statement on
a systematic and rational basis over the periods
necessary to match them with the related costs.
Under ICDS, such grants are not specifically
covered. However, it needs to be seen whether
such grants get covered by a residuary category
under the ICDS which requires grants to be
recognized over the periods necessary to match
them with the related costs they are intended to
compensate.
Grants related to non-depreciable
assets
As per the AS, grants relating to non-depreciable
assets which do not require fulfilment of
any obligations are credited to the Capital
Reserve. If such grants require fulfilment of
some obligations, they should be credited to
income over the period over which the cost of
meeting the obligations is charged to income.
The treatment as regards non-depreciable assets
which require fulfilment of certain obligations
remains the same in ICDS. However, under
the ICDS, there is no option of credit to capital
reserve in case of non-depreciable assets.
Grants related to depreciable assets
As per the AS, grants related to depreciable
assets are either treated as deferred income and
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transferred to the Statement of Profit and Loss in
proportion to depreciation, or deducted from the
cost of the asset. Under the ICDS, such grants are
required to be deducted from the actual cost or
written down value of the assets. Even though,
deferred income approach is not allowed under
ICDS, the same will not result in any additional
tax outflow since the net tax effect under both
approaches would be the same.
The AS is silent in case of grant which is not for
any specific asset, whereas ICDS requires such
grants to be apportioned to the various assets
with reference to which the grant was received.
It is to be noted that as per the Ind AS, grants
related to assets, should be presented in the
Balance Sheet only by treating the grant as
deferred income.
Grants related to non-monetary assets
The AS requires grants in relation of nonmonetary assets, given at a concessional rate to
be recorded on the basis of their acquisition cost.
In case assets have been acquired free of cost,
nominal value should be recorded. The position
is same under ICDS as well. However, as per Ind
AS non-monetary assets and grants received at
a concessional rate are to be accounted for at a
fair value.
Grants for compensation of expense /
loss
Under AS, Government grants receivable as
compensation for expenses or losses incurred or
for giving immediate financial support without
any further related costs are recognized in the
period in which receivable. ICDS also prescribes
a similar treatment in respect of such costs.
Refund of grants
In case of refundable grant related to revenue,
the AS requires the same to be applied first
against any unamortized deferred credit and
the remaining amount is to be charged to the
profit and loss account. In case of fixed assets,
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refundable grants are to be increased in the book
value of the asset or reduced from the capital
reserve. Under the ICDS, refund of grants related
to revenue are treated similar to the AS. In case
of refund of grants related to depreciable assets,
the same is required to be increased in the actual
cost or written down value of the block of assets.
Disclosures
In terms of disclosure requirements, whilst
the AS requires only the accounting policy
with respect to grants and nature and extent
of recognized grants to be disclosed, the ICDS,
additionally requires disclosure of the nature
and extent of grants not recognized and reasons
thereof to be disclosed. This would presumably
give the tax authorities a greater chance at
probing grants which have not been recognized.
In this context it is pertinent to note that para
4.2 of the ICDS requires that recognition of
Government grants shall not be postponed
beyond the date of actual receipt.
Impact on current tax position
Currently, the Income-tax Act, 1961 (‘Act’)
considers grants related to fixed assets as a
deduction from the cost of the asset. In case
grants are not directly relatable to a specific
asset, the proportionate amount (i.e. specific
assets as a percentage of total assets) is employed
to determine the related grant which is then
reduced from the cost of the asset.
Further, grants related to revenue are taxable
under section 28 which covers benefits arising
from exercise of business or profession within
its ambit.
The Act is however silent in case of grants in
the nature of promoters’ contribution which are
not related to specific fixed assets or revenue.
Further, certain grants are given for encouraging
specific industries or starting industries in
backward areas. The leading judicial precedents
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on the point are Supreme Court decisions
in the cases of Ponni Sugars & Chemicals Ltd.
& Ors. [260 ITR 605] and Sahney Steel & Press
Works Ltd. [228 ITR 253]. The general principles
which arise therefrom are that the purpose for
which the grant is given is of prime importance.
Accordingly, grants related to revenue are
considered as such and grants related to capital
are to be reduced from asset cost or treated as
non-taxable capital receipt. However, there is
significant contention in the area of grants which
are meant as promoters’ contribution. The tax
payers have traditionally tried to take shelter of
various judgments to characterize such grants
as capital receipts stating that grants have been
given for setting up a business/completing a
project.
Even though the current ICDS does not contain
anything specific on grants in the nature of
promoters’ contribution, it has a residuary category
where such grants will get covered and will be
charged to revenue based on matching cost principle.
However, ICDS is subject to the Act and hence,
Supreme Court judgments on the issue will need to
be matched to the facts of the case and tax positions
will need to be taken accordingly.
Impact on deferred taxes
There would not be any significant impact on
deferred taxes due to this ICDS.
MAT impact
MAT impact on account of ICDS could arise in
a case where grants in the nature of promoters’
contribution or relating to non-depreciable
assets which do not require fulfilment of any
obligations are treated differently for the purpose
of financials as per AS i.e. as a capital reserve as
compared to treatment as a revenue item as per
ICDS. Thus, the taxable income under ICDS will
be higher than the tax on book profits as per AS.
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