A subsidy is an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain Goods and Services. With subsidies, consumers are able to access cheaper products and commodities. Markets that have positive externalities, which are extra benefits to society, tend to be favored in policy to provide a greater supply of that good and service. However, the Government has provided subsidy and Equity support grant such as:-

Scheme for Financial Support to Public Private Partnerships in Infrastructure (Viability Gap Funding Scheme).

The question under litigation is that the Equity support grant or grant received from government authority is considered under the definition of section 2(31) “Consideration” and specifically excluded from the definition of consideration, the same is considered as subsidy or not ??

Section 7(1) “Scope of Supply”

The term Supply has been defined under section 7 (1) of the CGST Act by way of Scope of Supply which includes:

(a) All forms of Supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business

Section 2(31) “Consideration”

(a) Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) To constitute a Supply, two conditions subject to exceptions stated under the Act must be fulfilled simultaneously.

1. Supply of goods or services or both; and

2. Consideration by a person in the course or furtherance of business. On detailed analysis from above discussion it is clearly seen that to constitute supply there must be consideration against which supply of goods or services or both shall be made: But definition of consideration specifically excludes subsidy from Central Government or a State Government and neither definition of subsidy nor definition of grant has been defined in CGST act 2017.

Further submitted that `Subsidy’, `Assistance’, `Grant’, `Cash Incentive’ or `Duty Drawback’ by whatever name designated is a paramount source of receipt and has been subjected to various ifs and buts of the taxing norms. From the detailed analysis of definition of consideration, government intention to exclude subsidy or amount in the form of any assistance/grant which are given improve the supply of certain Goods and Services.

We further throw light on Sub-Clause (xviii) in Section 2(24) of the Income Tax Act, 1961 providing an inclusive definition of the expression `Income’ under the taxing law. The relevant portion of Sub-Clause (xviii) is produced below:-

`2(24)(xviii) assistance in the form of a 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 other 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 in accordance with the provisions of Explanation 10 to clause (1) of section 43.

“Definition of income under income tax act 1961 includes “subsidy or grant” and the taxpayer will have to pay tax on grant or subsidy subject to such condition laid down in the act”

Hence, under GST subsidy or grant shall also consider as similar terms and includes under the definition of consideration under section 2(31).

It is further seen that Section 15 “ Value of Supply” provides:-

Subsidies directly linked to the price (excluding subsidies provided by the Central and State Governments) are includible in ‘value’ for supply of GST.

Authors’ comments

To constitute No tax liability on an Equity support grant, two section needs detailed analysis :

  • Section 2(31) “ Consideration” : If equity support grant is treated as consideration; than we go on another section
  • Section 15(2)(e): Subsidy directly linked to price excluding subsidy granted by central government/state government.

From above discussion and with reference to case laws

  • Equity support grant are given in the form of subsidy for smooth operations to run toll plaza to attract bidders for construction/operation/maintenance of road where high possibility of losses due to lesser toll collection to contractors, Hence such is excluded from definition of consideration and tax shall not leviable on such.
  • If Equity support grant is consideration for supply of work contract services but as per section 15 “Value of Supply” Subsidy provided by central government and state government shall not included in Value of supply. Hence, Value of supply is NIL and tax liability on such is NIL.

Government Support

(1) The total Viability Gap Funding under this scheme shall not exceed twenty percent of the Total Project Cost; provided that the Government or statutory entity that owns the project may, if it so decides, provide additional grants out of its budget, but not exceeding a further twenty percent of the Total Project Cost.

(2) Viability Gap Funding under this scheme will normally be in the form of a capital grant at the stage of project construction. Proposals for any other form of assistance may be considered by the Empowered Committee and sanctioned with the approval of Finance Minister on a case-by-case basis.

(3) Viability Gap Funding up to Rs. 100 crore (Rs. One hundred crore) for each project may be sanctioned by the Empowered Institution subject to the budgetary ceilings indicated by the Finance Ministry. Proposals up to Rs. 200 crore (Rs. Two hundred crore) may be sanctioned by the Empowered Committee, and amounts exceeding Rs. 200 crore may be sanctioned by the Empowered Committee with the approval of Finance Minister.

(4) Unless otherwise directed by the Ministry of Finance, the Empowered Institutions may approve project proposals with a cumulative capital outlay equivalent to ten times the budget provisions in the respective Annual Plan.

(5) In the first two years of operation of the Scheme, projects meeting the eligibility criteria will be funded on a first-come, first served basis. In later years, if need arises, funding may be provided based on an appropriate formula, to be determined by the Empowered Committee, that balances needs across sectors in a manner that would make broad base the sectoral coverage and avoid pre-empting of funds by a few large projects.

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