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Taxation of Capital Subsidy Received

1. Income Tax Treatment of Capital Subsidy under PSI 2019

The taxability of a capital subsidy depends on its nature and utilization:

a) Capital Receipt vs. Revenue Receipt

  • If the subsidy is provided for setting up a new industrial unit or acquiring capital assets, it is generally considered a capital receipt and is not taxable under normal provisions of the Income Tax Act.
  • However, if the subsidy is given as a reimbursement of operational expenses or to offset revenue expenditure, it may be treated as a revenue receipt and taxed under Section 28(iv) of the Income Tax Act.

b) Treatment under Section 43(1) – Reduction from Cost of Asset

  • As per Explanation 10 to Section 43(1) of the Income Tax Act, if the subsidy is related to acquiring a specific capital asset, the amount of subsidy is reduced from the cost of the asset for computing depreciation.
  • If the subsidy is not directly linked to the cost of any specific asset, it is not deducted from the cost, and depreciation is allowed on the full cost.

c) GST Refunds and Income Tax

  • If the capital subsidy includes a GST refund, it may be treated as an income and taxed under Section 28(iv) unless directly linked to capital investment.

2. GST Implications on Capital Subsidy

  • Capital subsidies are generally not subject to GST, provided they are not linked to the supply of goods or services.
  • However, if the subsidy is conditional upon making certain sales or meeting specific performance targets, it could be treated as a consideration for a supply and attract GST.

3. Maharashtra-Specific Aspects

  • Under PSI 2019, incentives such as Interest Subsidy, Power Tariff Subsidy, and Stamp Duty Exemption are given.
  • If the subsidy is in the form of a GST refund, it may not be taxed under income tax but should be verified with the specific conditions mentioned in the PSI 2019 scheme.

Summary of Taxation Treatment

Type of SubsidyIncome Tax TreatmentGST Treatment
Capital Investment Subsidy (for machinery, plant, land, etc.)Not taxable, but reduces asset cost for depreciationNot applicable
Interest SubsidyTaxable as revenue receiptNot applicable
Power Tariff SubsidyTaxable as revenue receiptNot applicable
Stamp Duty ReimbursementNot taxable if capitalizedNot applicable
GST Refund under PSIMay be treated as business income under Sec. 28(iv)No GST if not linked to supply

Conclusion

  • If the capital subsidy is for acquisition of fixed assets, it is not taxable but reduces the asset cost.
  • If it is for reimbursement of expenses, it is taxable as revenue income.
  • GST implications depend on whether the subsidy is linked to supply.

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