Business subsidies may attract tax

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Subsidies, tax concessions and incentives that add to business income such as the one given for setting up plants in certain states may be taxed now, following a provision in the Finance Bill passed by the Lok Sabha recently. This could trigger yet another controversy pertaining to taxes.

The Finance Bill has expanded the definition of income that is taxable under the Income Tax Act, 1961, by inserting a sub-clause on subsidies, grant, cash incentive and duty drawback, etc.

However, subsidies given to consumers such as Direct Benefits Transfer (DBT) may escape tax, experts say. But they want a clarification by the tax authorities on the matter.

Officials say the taxes may apply only to business income.

“There was an ongoing controversy on whether incentives given for setting up facilities in the form of grants and subsidies should be taxed. This provision in the Bill is meant to clear that. The clarification in the Finance Bill should be read contextually,” said a tax official.

According to amendments to the Finance Bill, 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 the central government or 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”.

Taxability of ‘subsidies’ has been a subject matter of several judicial decisions on the classification of the benefit being capital or revenue in nature, depending on the purpose of the ‘subsidy’.

There were controversies and conflicts on taxability of income generated out of incentives and grants given to set up facilities. With this clarification, even duty rollbacks could come under the tax ambit. Some experts say a majority of duties are already liable to tax.

“The amendment has been made in Section 2(24) of the Income Tax Act that pertains to income and that could apply to all taxpayers. Even if the intent was to only tax business income, a plain reading of the law currently encapsulates all subsidies.



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