Treatment of Duty Free Entitlement (Govt. Assistant) under Income Tax and IndAS

Implication under Ind AS

Government grants are 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.

Treatment of Grants related to Income

Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that:

(a) The entity will comply with the conditions attaching to them; and

(b) The grants will be received.

Following conclusion can be made from above mentioned provisions

A government grant is not recognised until there is reasonable assurance that the entity will comply with the conditions attaching to it, and that the grant will be received. Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled

The manner in which a grant is received does not affect the accounting method to be adopted in regard to the grant. Thus a grant is accounted for in the same manner whether it is received in cash or as a reduction of a liability to the government.

However in some cases instead of providing a cash grant, a government may waive the amount payable by entity. e.g.  a liability for taxes ( excise duty, sale tax, custom duty , subsidies). Under IndAS , these amounts would be qualify as government grant  because in substance there is transfer of resources, although it is in the form of a waiver of expenses.

Implication under Income Tax

As per definition given in Income tax Act u/s 2(24) 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 authority or body or agency in cash or kind to the assesses 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.

Analysis

By analysing the above mentioned provision I came to conclusion that.

1. For the purpose of accounting first we have to create expense for custom duty and further we also have to create corresponding entries for recognition of income. Although the ultimate impact on profit would be Nil.

2. Since it is waiver of expense this should be treated as income as per definition given in income tax act.