Another reason to pay tax - LPG subsidy

Income tax dept will treat LPG subsidy amount transferred to beneficiaries' account as income and tax them on it

The government has stirred up a hornet’s nest with its Direct Bank Transfer (DBT) scheme. Consumers are in for a rude shock, as the income tax department will be considering the LPG subsidy amount that the government transfers to their account as income and will be asking the consumers to pay tax on it. An Economic Times report quotes an income tax officer as saying that no clarification or circular has been issued on how to treat the money that will be credited in a consumers account.

Income tax authorities are well within their rights to consider this subsidy as an income as it gives the same treatment to the corporate sector. Subsidies dished out by government are of two kinds, capital and revenue. Capital subsidy is that which is given for set up a manufacturing unit or any other activity which the government feels will help increase employment and investment. Revenue subsidies, on the other hand are those that are used to supplement income and improve profits.

Revenue subsidies are taxed by income tax authorities. There a number of precedents where the court has intervened and allowed exemption in capital subsidy but insisted on revenue subsidy. Bombay High Court has clarified that doubt in the case of Commissioner of Income Tax versus Chaphalkar Brothers in an order dated June 8, 2011 relying on the Supreme Court judgement in Sahney Steel and Press Works Ltd versus Commissioner of Income Tax judgement.

Crux of the matter is that the subsidy you receive is of revenue in nature and hence taxable as the money you receive is going to enhance your income. Even if the income tax authorities do issue a circular experts feel that it will expose itself to be challenged in the court.

There are a few things the DBT issue opens up. Number one is that government has not thought through the process before implementing it. DBT no doubt is a good scheme which in the case of kerosene, at least,has shown promise in reducing the subsidy burden. But in the case of kerosene the tax issue does not really arise as the fuel is issued only to those below the poverty line, who in any case do not fall in the tax bracket. However, in LPG the subsidy is applicable to mostly tax paying middle and upper class people.

There is the other issue of broad basing the tax net through DBT. All those who will receive bank transfers in their account will be on the radar of income tax authorities. Generally LPG is registered in the name of ration card holder, who in a number of cases will be the eldest in the family. Even if they are retired and do not have any income they might have to disclose the DBT entry by filling a zero tax return, adding to their hassle and cost. Acceptance of the scheme will then be at stake. Further, the other programmes that will be using the DBT route to pay out subsidies might also take a hit.

From a consumer point of view there is an immediate increase in the price of LPG to the extent of tax paid. He might also look at it like the government is paying it with one hand and taking it from another, which does not make the government very popular. In any case they are unhappy with the ceiling that the government has imposed on LPG consumption. This is not taking into account the poor implementation of the scheme and the number of complaints it has received.

Bottom line is the impression that the government and more importantly the NAC (National Advisory Council) members wanted to give of giving money in the hand of the consumer through DBT is not working. Perhaps they should think of including an income tax officer in NAC.