The Finance Act treats all subsidies, grants, cash incentives, duty drawbacks, waiver, concessions and reimbursements as taxable income. However, the Finance Ministrty has claried that there would be no income tax on LPG and other welfare subsidies for individuals
UPDATE: Updated to include clarification from Finance Ministry
First, the union government made it mandatory for every consumer to avail subsidy benefit for the liquefied petroleum gas (LPG) refill through bank accounts. However, to the shock of most taxpayers, who are receiving such subsidy, the amendment in the Finance Bill has termed this as income, and thus liable for taxation. Earlier, experts were divided whether such subsidy was taxable under the Income Tax (I-T) Act as there was no clear guidance from the authorities. Late in the evening (after this article was published), the government clarified that provision in Finance Bill 2015 won't affect the LPG subsidy and other welfare subsidies received by individuals.
The Finance Bill, 2015, as passed by Lok Sabha on 30th April has specified that subsidies no longer would be treated as capital gains, but as income (revenue receipt). The amendment in the definition of 'Income' under Section 2(24) in the Finance Bill, 2015, says, "A new sub-clause (xviii) is proposed to be inserted in Section 2(24) to provide that 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 assesse [other than one considered under Explanation 10 to Section 43(1)] would be included in assessee's income."
This in other words any subsidy that is not reduced from the actual cost of the asset in view of provisions of Explanation 10 to Section 43(1) will be taxable as revenue receipts of the assessee.
This includes the subsidy for LPG refill as well. However, there are still some flaws in the taxability of subsidy for LPG. Some experts feel that the consumer pays in full towards buying the LPG refill at market price, for which she may already be paying income tax. Since the government is simply reimbursing the subsidy amount, it may lead to double taxation.
For example, for a LPG refill the consumer pays about Rs650 as full market price from her pocket. Next the government reimburses around Rs200 (actual amount may differ), the difference between subsidised price and the full market price. The consumer may already be paying income tax on the total amount of Rs7,800 (Rs650x12 LPG refill per year). If she receives Rs2,400 as subsidy, then as per the Amendment in the Finance Bill, her tax liability would increase by this amount.
So in the end, the consumer would end up paying income tax on Rs10,200 (Rs7,800 actual payment +Rs2,400 LPG subsidy). If the consumer is in the highest tax bracket, then she will have to pay Rs3,060 towards the income tax, instead of Rs2,160 she is already paying. An additional burden of Rs900 because of the LPG subsidy.
It is preposterous to treat LPG subsidy as income, as it is contrary to reason. It is only a refund of the excess amount paid by the consumer to the gas dealer, which the oil company refunds to the beneficiary to comply with the government order to sell the LPG cylinder at the stipulated price to the users. It is therefore, impetuous for Finance Minister Arun Jaitley and the Modi government to take a view that this amount is taxable at the hands of beneficiaries.
So what is the way forward? If the Narendra Modi government is serious about providing subsidy, then there is a need to make exemptions, especially for subsidies provided as social benefits, like LPG subsidy. If there is no exemption provided, then honest taxpayers and a very large number of them will have to pay more tax.
The Finance Ministry, in a clarification, has said that the provision in the Finance Bill will not affect LPG subsidy and other welfare subsidies received by individuals.
"The Income Computation and Disclosure Standards (ICDS) notified by the Central Board of Direct Taxes (CBDT) is applicable to persons having income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and following Mercantile System of Accounting. This is not applicable to individuals not having any income chargeable under the head "Profits and gains of business or profession" and receiving LPG subsidy or any other subsidy which is for the welfare of the individual. The Finance Bill, 2015 proposes to align the definition of Income with that provided in ICDS for this purpose. To restate the position, the provision in the Finance Bill, 2015, will not affect the LPG subsidy and other welfare subsidies received by individuals," the Finance Ministry said in a release.