Government grants ICDS VII

Government grantsICDS VII

Agenda • Scope • Definitions • Recognition • Treatment of government grants • Refunds • Disclosures • Transitional provisions • Practical issues ICDS VII – Government grants

Scope ICDS VII covers Doesn’t deal with • Related to depreciable fixed assets; • Related to non-depreciable fixed assets; • Not directly related to any asset; • Grants given to provide immediate financial support; • Grants given in the form of non-monetary assets ; and • Any other grant • Government assistance other than in the form of government grants; (Technical or marketing advice) • and • Government participation in the ownership of the enterprise ICDS VII – Government grants This ICDS deals with the treatment of Government Grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements etc. [para 1]

Definitions Government • refers to the Central Government, State Government, agencies and similar bodies, whether local, national or international • are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude: • Those forms of Government assistance which cannot have a value placed upon them • Transactions with Government which cannot be distinguished from the normal trading transactions of the person Government Grants ICDS VII – Government grants

Recognition criteria Grant may be recognized earlier as Income under ICDS (upon receipt) than under Ind AS or Indian GAAP (when grant conditions are met subsequent to receipt of grant) ICDS VII – Government grants Reasonable assurance that the person shall comply with the conditions attached to them and the grants shall be received Recognition of government grant shall not be postponed beyond the date of actual receipt

Key difference – recognition criteria ICDS VII – Government grants

Case study- Export incentives Export Customers Facts • I Co manufactures goods from locally sourced materials and exports them • I Co is entitled to duty credit on exports which it can either itself use to import goods without payment of duty or sell the credit to other importers • I Co recognised duty credit in year 1 of Rs. 1cr on exports made in during year 1 • Duty credit was used in year 2 partly by importing goods and partly by sale to other importers Import supplier Export of goods Importer I Co Sells duty credit Purchase of inputs Local suppliers ICDS VII – Government grants

Case study- Export incentives(cont.) • Tax treatment pre ICDS • SC ruling in the case of Excel industries permits I Co to recognize duty credit of Rs. 1 cr. in year 2 when there is actual import or sale of duty credit • But tax recognition in year 2 may create MAT mismatch in year 1 Book treatment as per ICAI AS AS 12 permits I Co to recognize duty credit of Rs. 1 cr. in year 1 since there is reasonable assurance of compliance of attached conditions and reasonable certainty of ultimate collection Pre ICDS • Tax treatment post ICDS • ICDS requires recognition in year 1 on lines of AS 12 • ICDS provides recognition cannot be postponed beyond date of actual receipt • Can I Co argue that ICDS cannot disturb ‘legally due’ concept of income as understood by SC? Post ICDS ICDS VII – Government grants

Treatment of government grants Related to depreciable fixed asset(s) Related to non-depreciable asset deducted from actual cost/ WDV of the asset(s) With Condition recognised as income over the same period over which the cost of meeting such obligations is charged to income. Without condition recognized as income over periods necessary to match them with related costs which they are intended to compensate Compensation for expenses or giving immediate financial support Not directly relatable to asset Non-monetary grants at concessional rate Other government grants Proportionate amount to be reduced from actual cost/written down value recognized as income over periods necessary to match them with related costs which they are intended to compensate Accounted for on the basis of their acquisition cost Shall be recognized as income of the period in which it is receivable ICDS VII – Government grants

Key difference: Treatment of Government Grants ICDS VII – Government grants

Treatment of Government Grants (Cont.) ICDS VII – Government grants

Case study- Grants related to non depreciable assets Facts • I Co buys land at cost of Rs. 10 cr. in year 1 in backward area pursuant to package scheme of incentives offered by Government • I Co has obligation to set up Industrial unit • I Co receives subsidy of Rs. 2 Cr. from Government for meeting cost of land in year 3 after setting up of unit I Co. GOI Subsidy for meeting cost of land Buys land in backward area for setting up of unit Land ICDS VII – Government grants

Case study- Grants related to non depreciable assets • Tax treatment pre ICDS • Arguably, subsidy in given facts is non chargeable capital receipt • Land cost may not be reduced by Rs. 2 cr. If primary object of subsidy can be substantiated to be for promoting industrialization and employment in backward area Book treatment as per ICAI AS I Co. can recognize subsidy of Rs. 2 cr: a. In capital reserve in balance sheet Or b. Reduced from the value of land Pre ICDS • Tax treatment post ICDS • Income includes government subsidy which is not adjustable in the “cost of asset” • ICDS recognition of grant as income over a period matching with incurrence of related cost • Can it be argued that ICDS will not apply as subsidy is on capital account and land is covered under capital gain? Post ICDS ICDS VII – Government grants

Case study- Subvention from parent Facts • I Co is a 100% subsidiary of F Co • I Co has incurred significant losses due to ‘marco economic factors’ in India • Transactions between F Co & I Co have been at ALP • I Co’s net worth is negative and is unable to borrow funds for its business operations • To enable I Co to protect its net worth and raise funds, F Co provides a subvention on voluntary basis as a measure to stabilise net worth of I Co • F Co does not claim any tax deduction for subvention in its own jurisdiction F Co. Outside India India Subvention I Co. (WOS) ICDS VII – Government grants

Case study- Subvention from parent • Tax treatment pre ICDS • Judicial precedents support I Co to claim subvention as non chargeable capital receipt • There may be MAT exposure if amount credited to P&L a/c Book treatment as per ICAI AS ICAI AS 12 does not cover parental subvention Possible for I Co to credit subvention to capital reserve in balance sheet Pre ICDS • Tax treatment post ICDS • ICDS does not cover parental subvention and accordingly, has no impact on parental subvention • MAT exposure would remain same Post ICDS No change in Pre and Post ICDS ICDS VII – Government grants

Case study- Grant related to depreciable fixed asset Co. A has received grant of Rs. 10 crore from Rajasthan Government to procure a plant worth Rs. 25 Crores to be used in manufacturing unit based in Alwar . How this plan should be recognized as per ICDS. Balance sheet Asset 25 Crore Grant -10 Crore Net Amount to be shown as per ICDS 15 Crore No difference in Pre and Post ICDS implication – subsidy will be reduced from the cost of asset ICDS VII – Government grants

Case study- Grant related to non depreciable fixed asset Co. A has received grant of Rs. 10 crore from Rajasthan Government to procure land worth worthRs. 25 Crores on which A will construct the plant. As condition, Company needs to keep 1000 local work force for next 5 years, else government will ask for refund of the grant on pro-rata basis How this plan should be recognized as per ICDS. Balance sheet Asset Land 25 Crore Liabilities Grant 10 Crore Grant of 10 crore will be recognized as income in p&l over the period of 5 years. Pre ICDS – grant would be regarded as capital receipt ICDS VII – Government grants

Case study- Non Monetary grants Company A has received the land worth Rs. 50 lac from the Government by just paying Rs. 30 Lac only. This will be used for the construction of new plant which will ultimately generate jobs in the society. How this grant will be recognized as per ICDS Balance sheet Asset 50 lac Grant -20 Lac Net Amount to be shown as per ICDS 30 Lac Accounted for on the basis of their acquisition cost No difference in Pre and Post ICDS implication ICDS VII – Government grants

Refund of government grant Depreciable assets Other than depreciable assets Refund recorded by increasing the actual cost or WDV of the block of assets Depreciation provided prospectively at the prescribed rate Refund shall be first applied towards any unapplied deferred credit and then charged to profit and loss account ICDS VII – Government grants

Treatment of Refunds ICDS VII – Government grants

Case study- Refund – Depreciable asset On 1 April 2015 Co. A has received conditional grant of Rs. 10 crore from Rajasthan Government to procure a plant worth Rs. 25 Crores to be used in manufacturing unit based in Alwar. Life of the plant is 10 years. There was no certainty of the conditions being fulfilled and in the 2nd year Co. A failed to satisfy the condition. 9 crore out 10 has been refunded to the Government How this plan should be recognized as per ICDS. Pre ICDS Post ICDS Since there was no certainty that the conditions would be fulfilled, grant should not be recognized in year 1 as it can be argued that there was no reasonable assurance that the A will comply with the conditions attached. 2015 Grant will be recognized as it can not be postponed beyond receipt. 1st April 15 2016 Asset 13.5 Crore Grant Refund 9 Crore Asset after refund 22.5 Crore ICDS VII – Government grants

Comparative: ICDS VII and Act ICDS VII – Government grants Although prima facie, there is no variation/conflict between the provisions of the Act and ICDS VII, yet we have highlighted below some key points for consideration: *The term ‘income’ includes assistance by Government (in cash or in kind) to the assessee other than assistance which is taken into account for determination of actual cost of asset in accordance with explanation 10 to Section 43(1)

Disclosures ICDS VII – Government grants

ICDS requires disclosure of all unrecognized grants Perhaps, the intent is to require disclosure of grants which are not recognized due to absence of reasonable assurance of compliance of future conditions and/or receipt of grant Illustrative cases : Implications Application made for capital subsidy to be received in future on completion of construction Entitlement to reimbursement of custom/excise on capital equipment for 10 years but equipment yet to be acquired Advance license obtained for duty free import of goods with re-export condition but imports are yet to be made ICDS VII – Government grants

Transitional provisions ICDS VII – Government grants All the Government grants which meet the recognition criteria on or after 1st day of April, 2015 shall be recognised for the previous year commencing on or after 1st day of April, 2015 in accordance with the provisions of this standard after taking into account the amount, if any, of the said Government grant recognised for any previous year ending on or before 31st day of March, 2015.

Practical issues ICDS VII – Government grants • Sales tax exemption • As sales tax exemption is not an assistance in cash or kind, the same cannot be regarded as Government grant • Accordingly, ICDS VII shall not apply to sales tax exemption [similar view has been expressed in compendium of opinions, Volume XX] • Assistance that cannot reasonably have a value placed upon them • Such grants are not covered by ICDS VII • Accordingly, ICDS VII shall not apply to such grants • Examples - free technical or market advice, provision of guarantees etc.

Practical issues (cont.) ICDS VII – Government grants • Procurement policy • Government’s procurement policies in the form of purchase preference, price preference, reservation policies etc. may benefit a company immensely and account for huge chunk of its business • However, ICDS VII does not cover transactions with Government which cannot be distinguished from the normal trading transactions of the person • Such procurement policy is an assistance which cannot be distinguished from normal trading operations of the company and hence, is not a Government grant

Questions? ICDS VII – Government grants

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Government grants ICDS VII