1. Government grants ICDS VII

2. Page 2 Agenda ► Scope Definitions Recognition Treatment of government grants Refunds Disclosures Transitional provisions Practical issues ICDS VII – Government grants

3. Page 3 Scope 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] ICDS VII – Government grants ► 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 coversDoesn’t deal with

4. Page 4 Agenda Scope ► Definitions Recognition Treatment of government grants Refunds Disclosures Transitional provisions Practical issues ICDS VII – Government grants

5. Page 5 ICDS VII – Government grants Definitions Government ► refers to the Central Government, State Government, agencies and similar bodies, whether local, national or international Government Grants ► 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

6. Page 6 Agenda Scope Definitions ► Recognition Treatment of government grants Refunds Disclosures Transitional provisions Practical issues ICDS VII – Government grants

7. Page 7 Recognition criteria ► 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 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

8. Page 8 Key difference – recognition criteria ICDS VII – Government grants ICDS VIIAS 12Ind AS 20 Lower threshold- Reasonable assurance required for a.conditions of grant to be met and : b.Grant shall be received: or c. Grant is received Recognition cannot be postponed beyond receipt. Higher threshold- Reasonable assurance required for a.conditions of grant to be met and b.reasonable certainty for receipt of grant. Same as IGAAP

9. Page 9 ICDS VII – Government grants Case study- Export incentives Export Customers Export of goods Import supplier Importer I Co Local suppliers Purchase of inputs Sells duty credit 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

10. Page 10 ICDS VII – Government grants Case study- Export incentives(cont.) 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 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 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? Pre ICDS Post ICDS

11. Page 11 Agenda Scope Definitions Recognition ► Treatment of government grants Refunds Disclosures Transitional provisions Practical issues ICDS VII – Government grants

12. Page 12 ICDS VII – Government grants Treatment of government grants Related to depreciable fixed asset(s) deducted from actual cost/ WDV of the asset(s) Related to non-depreciable asset 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 Other government grants 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 Shall be recognized as income of the period in which it is receivable Not directly relatable to asset Proportionate amount to be reduced from actual cost/written down value Non-monetary grants at concessional rate Accounted for on the basis of their acquisition cost

13. Page 13 ICDS VII – Government grants Key difference: Treatment of Government Grants ConceptICDSAS-12Ind AS 20 Grant for assets but not directly related to any particular asset So much of the amount which bears to the total grant, the same proportion as such asset bears to all the assets for which grant is received, shall be reduced from actual cost Does not specifically cover this Grants in the form of non- monetary assets given at concessional rates To be recorded at acquisition cost Both grant and asset are accounted for at fair value

14. Page 14 ICDS VII – Government grants Treatment of Government Grants (Cont.) ConceptICDSAS-12Ind AS 20 Monetary grants related to depreciable assets Shall be deducted from the cost of assets/ WDV of the block of assets No option to recognize as deferred revenue Either deducted from gross value of the asset or treated as deferred income and recognised in P&L on a systematic basis over the useful life of assets Grant shall be set up as deferred income and recognised in P&L on a systematic basis over the useful life of assets

15. Page 15 Case study- Grants related to non depreciable assets ICDS VII – Government grants 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 GOI I Co. Subsidy for meeting cost of land Land Buys land in backward area for setting up of unit

16. Page 16 ICDS VII – Government grants Case study- Grants related to non depreciable assets 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 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 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? Pre ICDS Post ICDS

17. Page 17 Case study- Subvention from parent ICDS VII – Government grants 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. Subvention I Co. (WOS) Outside India India

18. Page 18 ICDS VII – Government grants No change in Pre and Post ICDS Case study- Subvention from parent 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 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 Tax treatment post ICDS ► ICDS does not cover parental subvention and accordingly, has no impact on parental subvention ► MAT exposure would remain same Pre ICDS Post ICDS

19. Page 19 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. Asset 25 Crore Grant-10 Crore Net Amount to be shown as per ICDS15 Crore Balance sheet No difference in Pre and Post ICDS implication – subsidy will be reduced from the cost of asset

20. Page 20 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 worth Rs. 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. Asset Land25 Crore Liabilities Grant10 Crore Balance sheet 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

21. Page 21 ICDS VII – Government 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 Asset 50 lac Grant-20 Lac Net Amount to be shown as per ICDS30 Lac Balance sheet Accounted for on the basis of their acquisition cost No difference in Pre and Post ICDS implication Case study- Non Monetary grants

22. Page 22 Scope Definitions Recognition Treatment of government grants ► Refunds Disclosures Transitional provisions Practical issues Agenda ICDS VII – Government grants

23. Page 23 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 Depreciable assets Other than depreciable assets ICDS VII – Government grants Refund of government grant

24. Page 24 ICDS VII – Government grants Treatment of Refunds ConceptICDSAS-12Ind AS 20 Related to specific fixed assets Increasing actual cost/written down value of asset Increasing book value of asset or reducing capital reserve/deferred income To be applied first against any unamortized deferred credit. Any excess to be charged to P&L account

25. Page 25 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 2 nd 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. 1 st April 15 ICDS VII – Government grants Pre 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. 2016 Asset 13.5 Crore Grant Refund 9 Crore Asset after refund 22.5 Crore Case study- Refund – Depreciable asset Post ICDS

26. Page 26 Comparative: ICDS VII and Act 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) ConceptActICDSComments Grants related to depreciable fixed assets To be reduced from actual cost/written down value No variation Grants related to non depreciable assets To be recognised as income post amendment by Finance Act, 2015 * To be recognized as income No variation Refund of grant related to depreciable assets Based on judicial inferences, to be added to actual cost/written down value To be added to actual cost/written down value No variation ICDS VII – Government grants

27. Page 27 Agenda Scope Definitions Recognition Treatment of government grants Refunds ► Disclosures Transitional provisions Practical issues ICDS VII – Government grants

28. Page 28 Nature and Extent of Government Grants Recognized during the previous year as income Not recognized during the previous year as income and reasons thereof Recognized by way of deduction from actual cost/written down value of assets Not recognized by way of deduction from actual cost/written down value ICDS VII – Government grants Disclosures

29. Page 29 Implications ► 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 : ICDS VII – Government grants 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

30. Page 30 Agenda Scope Definitions Recognition Treatment of government grants Refunds Disclosures ► Transitional provisions Practical issues ICDS VII – Government grants

31. Page 31 Transitional provisions 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. ICDS VII – Government grants

32. Page 32 Agenda Scope Definitions Recognition Treatment of government grants Refunds Disclosures Transitional provisions ► Practical issues ICDS VII – Government grants

33. Page 33 Practical issues a.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] b.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. ICDS VII – Government grants

34. Page 34 Practical issues (cont.) c.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 ICDS VII – Government grants

35. Page 35 Questions? ICDS VII – Government grants

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