Government Grants: An Exhaustive Analysis Under

Income Tax Law and Ind AS Framework

Government grants play a pivotal role in the economic development of a country by facilitating industrial expansion, promoting social welfare, and encouraging investments in backward regions. These grants—whether in the form of direct financial assistance, subsidies, or indirect fiscal incentives—have significant accounting and tax implications. It becomes essential for enterprises, including corporates, startups, and not-for-profit organizations (NPOs), to understand the nuanced treatment of such grants both in their financial statements under Ind AS and in computing taxable income under the IncomeTax Act, 1961. This article provides a detailed and integrated analysis of the treatment of government grants under both frameworks, supported by legal provisions, accounting standards, judicial pronouncements, and practical examples.

 I. Treatment of Government Grants under Indian Accounting Standards (IndAS20)

1. Conceptual Definition and Scope

As per Ind AS 20– Accounting for Government Grants and Disclosure of Government Assistance,  government grants are defined as:

“Assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.”

It is important to note that general forms of government assistance that cannot be reasonably valued or are not specifically related to operating activities (e.g., tax holidays, provision of infrastructure, or policy support) do not fall within the scope of Ind AS 20.

2. Recognition Principles

Two fundamental conditions must besatisfied before a government grant can be recognized:

There should be reasonable assurance that the entity will comply with all the conditions attached to the grant.

There should be reasonable assurance that the grant will actually be received.

Recognition of government grants is not merely based on receipt of the grant but must beguided by substanceover form, i.e., the economic reality of the transaction.

3. Classification of Grants

Government grants are classified under Ind AS 20 into two broad categories:

a) Grants Related to Revenue

These are grants intended to subsidize operating costs, such as

• Re imbursement of electricity bills
• Support for wage payments
• Compensation for training and skiling expenditures

Accounting Treatment:

Recognized in profit or loss on a systematic basis over the periods in which the related costs are incurred.

Can either be presented as a separate line item under "Other Income"or be deducted  from the related expense.

b) Grants Related to Assets (Capital Grants)

These grants are received for:

• Purchase or construction of fixed assets like plant, machinery, or land.
• Establishing new infrastructure or green field projects

Accounting Treatment

Entities have two options:

• Deduct the grant from the carrying amount of the asset.
• Recognize it as deferred income and a mortizeit to profit or lossover the useful life of the asset.

c) Non-Monetary Grants

Occasionally, governments may transfer non-monetary assets (e.g., land or buildings) either free of cost or at concessional rates

Accounting Treatment:

Such assets should be recorded either at fair value or at a nominal value, based on the
entity’s accounting policy.

d) Grants with Refund Conditions

If conditions attached to the grant arenot fulfilled, the grant may become refundable

Accounting Treatment

• There fundable amount is recognized as a liability.
• Any previously recognized deferred income or reduction in asset value must be reversed proportionately.

4. Disclosure Requirements under Ind AS20

Entities are required to make the following disclosures:

•  Accounting policies adopted for government grants.
• The nature and extent of government grants recognized.
• Unfulfiled conditions and other contingencies attached to the grants.
• How grants are presented in the financial statements (income or asset offset).

II. Treatment of Government Grantsunder IncomeTaxAct, 1961

Unlike Ind AS 20, the Income Tax Act, 1961, does not contain an explicit definition of government grants. The treatment under tax law depends largely on judicial precedents, the intent and purpose of the grant, and CBDT Circulars.

1. Classification into Capital and Revenue Grants

The most fundamental question in tax law is whether a government grant should be treated as:

Type	Description	Taxability
Captial Reciept	Meant for asset creation, new unit setup, or infrastructure development	Not taxable under general principles
Revenue Reciept	Meant for operational support or reimbursement of running costs	Taxable, forms part of income under Section 2(24) (xviii)

The purpose test (why the grant was given) supersedes the timing test (when it was received) in determining taxability.

2. Statutory Framework:Section 2(24)(xviii)

The Finance Act, 2015 inserted clause (xviii) under Section 2(24), which defines "income" to 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 a State
Government or any other authority...”

However, Explanation to this clause states

“Any subsidy or grant which is capital in nature shall not be treated as income.”

Hence, capital grants are outside the tax net, while revenue grants are taxed.

3. Judicial Pronouncements and Tests

CIT vs. Ponni Sugars and Chemicals Ltd. (2008) [SC]

• Grant received for repaying term loans taken for establishing an industry.
• Held to be a capital receipt,as the purpose was setting up a business, not earning income.

Sahasra Resources Ltd. vs. ACIT [ITAT Mumbai]

• Grant received for acquisition of assets.
• Held as a capital receipt,hence not taxable.

CITvs. Chaphalkar BrothersPune [SC, 2018]

• Government subsidy received for building multiplex theatres.
• Although received after business commencement, it was held to be capital in nature as it was linked to infrastructure creation.
• These judgments reinforce the “purpose test” — if the purpose is to aid capital expenditure, the grant is capital in nature even if received post commencement of business.

4. CBDT Circulars

CBDT Circular No. 14/2019 dated 3rd July 2019

• Clarified that capital subsidies received for setting up new businesses, purchasing plant & machinery, or acquiring fixed assets are not taxable, being in the nature of capital receipts.
• This aligns with judicial principles and provides administrative clarity to taxpayers

5. Practical Tax Treatment Scenarios

III. Harmonizing Ind ASand Income TaxTreatment

While both Ind AS and IncomeTax aim to reflect the economic reality of government grants, differences may arise due to:

• Timing differences(e.g., Ind AS may defer income, whereas tax may require immediate recognition).
• Presentation differences (deferred income vs. reduction in asset value).
• Recognition criteria (reasonable assurance under IndAS vs. actual receipt under tax)

Deferred Tax Impact

If government grants are treated differently in books and tax returns, deferred tax assets or liabilities must be recognized under IndAS  12  to ensure correct computation of tax expense in the financial statements

IV. Key Takeaways and Recommendations

Purpose DrivesTaxability: The character of the grant—whether capitalor revenue—is determinedby its purpose, not merely by its name or timing.

Capital Grants Are Generaly Non-Taxable: If the grant is for the acquisition of assetsor project setup, it is treated as  a capital receipt and thus excluded from taxable income.

Revenue Grants AreTaxable: Any grant intended to subsidize recurring expensesor reimburse operational costs constitutes income under tax law.

Maintain Detailed Documentation:  Entities should maintain formal communication from the government clearly stating:

• Purpose of the grant
• Nature of conditions
• Method of disbursal

Consistent Accounting-Tax Policies: Enterprises should ensure alignment between financial statement disclosures and tax filings to prevent mismatches and scrutiny.

Consult with Experts: Due to evolving juri sprudence and the factual nature of classification, it is advisable to consult tax and accounting professionals