Opinion

Stimulus package should allow deduction of Covid-related impairment losses of SMEs

Mohan R Lavi | Updated on April 29, 2020 Published on April 29, 2020

There are no clear provisions either in the Income Computation and Disclosure Standards or in the Income Tax Act on whether a provision for bad and doubtful debts can be claimed as a tax expense

Everyone will be hoping that India is entering the beginning-of-the-end phase of the lockdown. As India limps back to normalcy, small and medium entrepreneurs would be hoping that the much-expected stimulus package from the government is announced and implemented soon.

Irrespective of what the contents of the stimulus package are, the SME entrepreneur will be waiting expectantly for some relief in income-tax provisions.

Impairment

At some point in time, our SME entrepreneur will have to close his books for the year ended March 31, 2020, and file his tax returns. At that point in time, he would have a fair idea about the impact that Covid-19 and the lockdown has had on his business. It is possible that some of his trade receivables may no longer be receivable due to the fact that persons from whom this has to be received has informed him about their inability to pay. In some instances, part-payments could be realised while in others, nothing could come in.

Once the entrepreneur informs his accountant about this, the latter would do what they are trained to do — create a provision for these receivables. The popular term for such a provision is a rather dramatic ‘Provision for Bad and Doubtful Debts’, while Ind ASs (Accounting Standards) have a more pleasant name — ‘Impairment of Trade Receivables’.

Irrespective of the name, the entrepreneur is going to ask his tax consultant whether the provision can be claimed as a deduction under income tax while filing his return. These days, most tax consultants have a single response to permissible deductions under income tax laws — “will check and revert”.

The tax consultant would respond that there are no clear provisions either in the Income Computation and Disclosure Standards (ICDSs) or in the Income Tax Act on whether a provision for bad and doubtful debts can be claimed as a tax expense. The stimulus package can resolve this by permitting a deduction for impairment of trade receivables due to Covid-19. To ensure that the taxpayer does not use this as a tax-planning mechanism, a limit based on the age of the debt could be prescribed.

Our SME entrepreneur could also find out that some of his plant and machinery have also been impaired due to the lockdown. Accounting Standards permit making a provision for impairment losses while ICDSs and the Income Tax Act are silent on this. Here again, a one-time provision can be introduced to permit Covid-related impairment losses. Again, the tax department could be worried about misuse of this provision. But it can take comfort in the fact that that an impairment would show up in some other form — usually in a reduction in sales or an increase in expenses.

GST

In the first instalment of relief measures, all regulators pushed all compliance dates to end-June hoping that the worst would be over by then. GST laws followed suit. Our SME entrepreneur would have paid GST on the basis of an invoice raised pre-Covid but the invoice might not get paid post-Covid. As per the present position in GST, he will not be able to reverse the GST paid by him.

It would not be far-fetched for the SME entrepreneur to expect that, during a pre-defined period due to Covid-19, GST is paid only on amounts invoiced and actually collected.

Such stimulus wish-lists could be endless and the Finance Minister could rightly worry about the amount this could cost the exchequer. She should not worry about this since parameters such as GDP, growth rate, fiscal deficit and tax collections will not matter for at least the next year or so. She might as well earn some brownie points with the tax-paying SME entrepreneurs of India.

The writer is a chartered accountant

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on April 29, 2020
This article is closed for comments.
Please Email the Editor