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What is subsidy?

Subsidy is a financial aid given to specified institution, business, or individuals with an aim to stimulate the process of setting up, expanding or promoting industrial units in the region. Subsidy is a financial incentive given by government to encourage businesses and strengthen economy. Subsidy helps Indian businesses to be competitive with International business. Mainly, government provide two type of subsidies:
Mainly, government provide two type of subsidies:
  1. Capital Subsidy
  2. Interest Subsidy

Capital Subsidy

A capital subsidy is a form of subsidy provided by government which is related to any specific capital asset and a group of assets. Ex. Government provide subsidy in CLCSS scheme which is 15% up front on cost of machinery.

Interest Subsidy:

An Interest subsidy is a form of subsidy provided by government to reduce the cost of interest borne by the businesses on loan taken for purchase of machinery.
Ex: Many state government interest subsidy up to 7% p.a. That means interest up to 7% will be borne by Government.

Schemes

There are various schemes of subsidy initiated by Central Government as well as state government. Scheme initiated by Central Government are applicable PAN India whereas schemes initiated by states are applicable only for respective state. Some of schemes are listed here. The list is not exhaustive list.
  • Electric Duty Exemption
  • Technology Upgradation Fund Scheme i.e TUFS (All Textile Sectors)
  • PMEGP (Prime Minister’s Employment Generation Programme)
  • START UP India
  • Interest subsidy scheme
  • Power Tariff Scheme
  • Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS)

Benefit of subsidy

  • Subsidy helps make essential items affordable such as food, fuel, textile products etc.
  • Subsidy is also given in the form of tax exemptions to certain sectors to promote industrialisation.
  • Subsidy helps Indian Manufacturer to compete with foreign manufacturers.
  • Subsidy helps business organisations to adopt latest technology.

Treatment of subsidy in Books of accounts

  • 1. Capital subsidy
  • There are two methods for treatment of capital subsidy:
    1. The subsidy amount is reduced from the cost of the asset to calculate book value and the depreciation will be charged over the reduced cost of asset.
    2. The subsidy will be treated as a deferred income in the financial statements. This income is recognized gradually in the profit and loss account over the useful life of an asset or say in the proportion of depreciation on such asset.
  • 2. Interest Subsidy
  • Interest subsidy received will be treated as income, hence it will be credited to profit & loss account.

Treatment of subsidy in Income tax

  • 1. Capital subsidy
  • If Capital Subsidy received is related to any specific asset then it is required to be reduced from actual cost of the asset or written down value of block of assets to which concerned asset or assets belonged to and depreciation shall be admissible on the balance amount only.
  • 2. Interest Subsidy
  • Subsidy (except those of capital nature) has been included in the definition of “Income” and so it is specifically made taxable under head of other income.
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