A phrase used the most to motivate entrepreneurs, generally attributed to Peter Drucker, is — profitability is the sovereign criterion of the enterprise. While large companies focus on earning huge margins by doing similar businesses with reduced risks, start-ups invest in innovation at a breakneck pace and make profits. But they are often slowed down by the lack of resources and funds. It is this gap that grants can bridge for start-ups.

Grants are economic benefits given in the nature of assistance to an entity for past events or future compliance with certain conditions. These funds are offered for activities with public benefit, that stimulates the economy, promotes new initiatives, and support a common cause. Moreover, these are free benefits that need not be repaid, unlike loans and deposits. It can be used to support start-ups to embark on activities with huge financial risks or a lack of funds.

In India, the government provides grants for entities involved in research and development, educational programmes, exports, charitable activities, start-ups, non-profit entities, pharmaceutical industries, and philanthropic activities. The Government of India has introduced Startup India Seed Fund Scheme 2021 to provide grants for 300 incubators and ₹945 crore has been allocated. Educational institutions, to encourage entrepreneurial mindset in students, hold campaigns to help provide grants for new innovations and projects, in a competitive field of study. Similarly, states and ministries have schemes to support organisations in specific initiatives.

Few private companies conduct competitions and provide grants to boost new ideas with an indirect benefit to the company. In 2019-20, semiconductor company Qualcomm conducted a competition to encourage start-ups to develop innovative hardware products using Qualcomm Advanced Technologies. The best innovative project will be awarded and grants will be provided on a deferral basis, depending on their operating leverage, and the licence for such intellectual property will be held by Qualcomm.

Different types of grants

There are different types of grants. Those provided by central or state governments and public-funded entities are government grants. Private grants are provided by foundations and other non-public funded entities. Monetary grants are rewards given in the form of money — that is to receive a fixed or determinable amount like export incentives or funding for new projects. While non-monetary grants are rewards given in forms other than money like — tax benefits, forgivable loans, assets given under nominal value or free of cost, and so on.

Due to complexity and competitiveness in availing grants, many grant consulting firms have emerged. They help a person through the grant application process and gain an edge over competitors. Grants relating to assets are given under a condition that an entity acquires or constructs a long-term asset, and grants relating to income is all grants other than grants relating to asset, given for incurring a specific expenditure.

Taxability of grants

Grants can be accounted for either on cash or on an accrual basis, only when there is reasonable assurance that the conditions attached to the grants will be fulfilled and grants will be received. Grants relating to assets should be further classified into Grants relating to depreciable assets & Grants relating to non-depreciable assets. In the case of grants relating to depreciable assets, adjust the grant in the carrying amount of the asset (capitalisation method) or account as a separate asset and adjust the grant by reducing the depreciation over the useful life of the asset.

For grants relating to non-depreciable assets, see whether any conditions (future obligations) are attached. If yes, account for the grant in P&L A/c on an amortisation basis depending on the expenses incurred to fulfil the obligation. If no conditions are attached, treat it as other income in P&L. Grant relating to income should be taken to P&L over the period in which the entity records the expenses incurred for which the grant is intended to compensate. There is no special rate for taxability of grants.

In the current scenario, many public and private organisations are providing grants for people capable of coming up with new revolutions that will spur growth and uplift the economy. As Demosthenes said, “Small opportunities are often the beginning of great enterprises.” Emerging businesses and young start-up owners can leverage this great opportunity to contribute to the ecosystem and strengthen it.

(The writer is CA Article Assistant, RVKS and Associates, Chennai.)