Finance Bill 2015- Amendment in Income Definition to
cover Subsidy/Grant/Reimbursement.
In a run up to Finance Act,
2015, the finance bill, 2015 has been amended on various counts and one of them
is an amendment in definition of Income
by inserting clause (xviii) in section 2(24), which read as under:-
“assistance in the form of
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 subsidy or grant or reimbursement which is taken into account for
determination of actual cost of the asset in accordance with the provision of
Explanation 10 to clause (1) of section 43”
The genesis of propose
amendment can be trace back to judicial precedents in which capital subsidy
(the benefit of subsidy being capital in nature) was held to be non-taxable.
Through above-mentioned amendment, all sorts of subsidy, capital or revenue in
nature, is supposed to make taxable.
This view on reason for purported
amendment is general and any support from statutory authority on raison d'etre
for such amendment is awaited.
In this write-up, attempt is
made to evaluate the said amendment to understand the intricacies involved in
the operation of stated provision.
1. Essentials to attract Provisions of Section
2(24)(xviii)
The various
benefits envisaged in section i.e
a) Subsidy
b) Grant
c) Cash
Incentive
d) Duty
Drawback
e) Waiver
f) Concession
g) Reimbursement
are taxable
in the hands of assessee, when such
benefits carry the character of “assistance”
The word
“assistance” has not been defined separately, as the said expression is
understood in the common parlance as to
help other voluntarily without any obligation on the part of assistance
provider.
Now to
evaluate whether stated benefits are taxable, it is pre-requisite to assess, whether
stated benefits are provided voluntarily or are in the course of performance of
duties mandated under statutory law.
Under Indian
democratic set-up, parliament or state legislature are law making bodies and
actual execution and implementation thereof is left in the hands of Central Government
or state government respectively.
To propound
on afore-said concept, let us consider some illustrations:-
·
Parliament has enacted a National Food Security
Act, 2013 to provide subsidized foods to Indian Citizen.
Now
providing food at concessional rate by the Government is mandated by law and it
will not be deemed as assistance in strict sense, as Government is carrying out
its duty of providing subsidized food, by implementing the law enforced by
Parliament.
·
Parliament has legislated Income Tax Act, 1961
wherein tax concession is given to assessee engaged in prescribed line of
business (Section 10A, 10B etc.)
Thus tax
concession cannot be deemed as Income of assessee under proposed section
2(24)(xviii), as the same is not an assistance but an execution of duty
enforced by law.
·
Ministry of Textile has formulated a scheme of
Interest Subsidy for loan taken under Technology up gradation fund scheme.
This
Interest subsidy is being proposed by Ministry of Textiles voluntarily to
promote the productivity of Textile Industrial Unit in India. This subsidy was
not enforced under legal law (I suppose), and as result Interest subsidiary
will be an assistance to an assessee and hence taxable.
Thus in my view, unless the state benefits u/s 2(24)(xviii) imbibe the
character of assistance, the same cannot be made taxable. If certain benefit is
granted under some obligation, then receiver is also accepting the same as his right
and in this process, the element of assistance is completely lacking. To this end, there is need to evaluate whether
the Direct Benefit Transfer benefit under LPG subsidy scheme, is assistance or
not and hence taxable in the hands of assessee or not.
2. Timing of Taxability of Assistance
In certain
schemes, the benefit is given to person in present but the same is subject to
certain conditions to be met in future.
Consider
the case of Import of Capital items without import duty under Export Promotion
Capital Goods Scheme (EPCG).
a) Under
EPCG, person is allowed to import Capital goods at NIL/concessional import
duty, but said person is required to carry out export of prescribed value in
specified time period in future.
b) Upon failure to execute required export,
person is required to pay import duty exempted earlier along with Interest.
The question for consideration is at what
time concession in Import duty will be taxable:-
a) At
the time of import of Capital Item?
b) At
the time, when required amount of export is executed in future?
To this end, there are further
complications, explained as under:-
a) Suppose
Import duty concession is being made taxable in present at the time of import.
b) Since
income proposed u/s 2(24)(xviii) is not allocated to specific head of Income,
the said benefit will be taxable under Residual Head – “Income from other
sources”.
c) Suppose
in future person fail to execute the require amount of export and is required
to pay import duty saved earlier along with penal interest.
d) Now
in view of provisions of Income computation & Disclosure standards V
relating to fixed assets, the said import duty on capital good is required to
be added to the cost of capital asset and depreciation will be allowed under
PGBP.
e) Thus
in above-stated illustration, one will appreciate that there is mismatch in
treatment of same item at two different point of time.
Thus transparency on above-mentioned count
is also required.
3. Any Authority or body or agency- Terms not defined
a) One
course of interpretation could be based on principle of ejusdem generis i.e
Authority or body or agency should be one established by Central or State
Government.
b) In
explanation 10 to section 43(1) providing for reduction of actual cost of
assets by the amount of subsidy or grant or reimbursement given by Central Government or State Government or
any authority established under any law or by any person, the legislation
has clearly postulate the status of benefit provider and among which
non-governmental body (any other person) is also provided. Thus based on this
analogy, a conclusion can be inferred that in section 2(24)(xviii) intention of
legislature is to cover both Governmental and non-Governmental authority or
body of agency. If that be the case, then stated benefits provided by any person (whether governmental or
non-governmental) to an assessee, the same would be taxable in the hands of
assessee under proposed amendment.
c) Thus
in view of afore-said, clarity is urgently required on interpretation of
above-stated terms.
In my personal view, the ostensible
amendment is unwarranted. In every decision-making, potential benefits is
casted against probable cost, to arrive at the conclusion. I think, in the
stated proposal, the revenue potential will certainly fall short of expected
cost in probable litigation. In current scenario, the need for certainty in tax
legislation is imminent and enactment of litigative provision should be put to
back burner. I also understand Government is putting all measure to cut down
fiscal deficit to foster economic growth, but in that process it, if want to increase
the tax revenue, should come up with bold and unambiguous provisions, which is
always welcome by business and investor fraternity.
