| Definition |
A financial aid or support extended by the government to individuals, businesses, or sectors to reduce costs and encourage activity. |
A direct reduction in the amount of tax owed by a taxpayer, granted by the government for specific activities or eligibility. |
| Form |
Can be given as cash payments, reduced prices, or grants. |
Reflected as a deduction from total tax liability on the tax return. |
| Timing |
Usually received at the point of purchase or during a project phase. |
Claimed at the time of filing the tax return, reducing tax due. |
| Purpose |
To lower the cost of goods/services or production and encourage consumption or production. |
To incentivize specific taxpayer behavior, like education, green energy investment, or R&D. |
| Target Audience |
Producers, consumers, industries, or sectors (e.g., farmers, transport, energy). |
Individual taxpayers or businesses who meet eligibility criteria. |
| Impact on Budget |
Increases government spending. |
Reduces government revenue (tax collection). |
| Example |
Food subsidy, LPG subsidy, fertilizer subsidy. |
Income tax credit for installing solar panels, education credits. |
| Disbursement Method |
Often transferred directly to beneficiaries or deducted from prices. |
Calculated and applied during tax filing, often through self-assessment. |
| Nature |
Expense item in the budget. |
Revenue foregone in the form of reduced tax income. |
| Dependency |
Can be availed regardless of tax liability. |
Only beneficial if there is tax liability (unless refundable). |
| Accounting Treatment |
Recognized as income or cost offset in beneficiary accounts. |
Reduces tax expense in financial statements. |
| Effect on Market |
Can distort prices, encourage overproduction or inefficiency. |
Generally market-neutral, targets specific outcomes without distorting base prices. |
| Policy Intent |
Support affordability and protect vulnerable populations or industries. |
Encourage compliance or investments in socially beneficial areas. |
| Refundability |
May be partially or fully refundable, depending on design. |
Some tax credits are refundable (excess is paid to the taxpayer), others non-refundable (limited to tax due). |
| Documentation |
May require subsidy application or direct enrollment. |
Requires evidence or documentation submitted with tax returns. |
| Visibility to Taxpayer |
Often more visible and direct in benefit (e.g., discounted product). |
Seen indirectly during tax filing and calculation. |
| Regulatory Risk |
Vulnerable to misuse or leakages in delivery. |
Typically less prone to fraud but dependent on proper documentation. |
| International Use |
Common in agriculture, energy, exports, public transport. |
Used widely for environmental, educational, and healthcare incentives. |
| Example in India |
Ujjwala Yojana LPG subsidy, PM-KISAN. |
Section 80C deductions, renewable energy tax credits. |
Government Subsidy vs Tax Credit