With Indian entities (including Global Corporations having R&D Operations in India) nowadays becoming more and more Research (R&D) oriented, it is imperative that Research expenditure forms a large component of the overall entity expenses, and therefore any regulatory policy/scheme that can help put at least partial relief to such organizations and/or give incentives to conduct more extensive/comprehensive R&D would be more than welcome. However, due to paucity of time, lack of research and/or understanding of policy framework/relevant provisions, and/or incorrect guidance from professionals in the industry, or any other pertinent reason, it is being seen that most entities do not take leverage of the provisions and hence either end up paying more-than-due tax or fail to take benefits available from the current provisions.
The intent is, therefore, to try and bring more clarity by highlighting the available provisions, but it is still recommended that a thorough professional be engaged for assisting in taking leverage of the available policies/schemes for more efficient execution and objective assessment of the tax savings, wherein a few professionals these days also work on taking a share from the overall savings that the entity is able to make through engagement with one or more various available policies, making it an even more attractive propositions for the entities as they don’t have to compensate the professional separately but only as a percentage of the savings.
To start with, one of the most commonly adopted and popular schemes these days is the registration of an entity (a newly formed entity) as a Startup Under the Startup India Action Plan of DIPP, comprehensive details of which can be seen here, basis which the qualifying entities that obtain the recognition as a Startup can apply for Tax exemption under section 80 IAC of the Income Tax Act, upon clearance of which, the Startup can avail tax holiday for 3 consecutive financial years out of its first ten years since incorporation. The start-up can avail Tax Exemption under Section 56 of the Income Tax Act in the event the Aggregate amount of paid-up share capital and share premium of the Startup after the proposed issue of a share, if any, does not exceed INR 25 Crore. Additional details of conditions under which the Tax Exemption under Section 56 of the Income Tax Act would be given can be reviewed in the circular here.
According to this policy, an entity is considered as a Startup when i) up to a period of ten years from the date of incorporation/ registration, it is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India, ii) turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees. iii) Entity is working towards innovation, development, or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. It is however to be noted that such an entity that is formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
The scheme has also made the cost of obtaining and registering Intellectual Properties (IPs) significantly cost-effective for Start-Ups. The Scheme for Facilitating Start-Ups Intellectual Property Protection (SIPP) facilitates registration of Patents, Designs, and Trademarks for Start-Ups, wherein, under the scheme the Startups only need to bear the statutory/ official fees for registration of IPs, that too at significantly reduced official fees, and the registration is handled through government-appointed facilitators. Professional fees payable to facilitators are to be paid by Government (through IP Registries) and not by Start-Ups.
A number of other Schemes backed by the Government can be seen on the DPIIT website here, which include schemes pertaining to bank loans at reduced interest rates (such as by SIDBI), IP Protection outside India (such as by BIRAC and MEITY), Industry Support/Cooperation Schemes, among many other Industry specific schemes.
Department of Scientific and Industrial Research (DSIR) also provides significant value addition to Research-oriented entities, wherein a research institution (other than a hospital) that is registered with the DSIR is exempted from paying any Custom duty on the purchase of any goods (equipment, consumables, computer software, prototypes, etc.) for conducting R&D. The subsidized GST rates for such items is 5% in case of import & interstate purchase, and 2.5% along with SGST and 2.5% in case of purchases within the state. Additionally, In-house R&D units recognized by DSIR in the area of pharmaceutical and biotechnology sector are eligible for duty-free import of specified goods for R&D and production (conditional). Furthermore, in-house R&D units engaged in the research and development in the area of chemical, drugs pharmaceuticals, (including clinical trials), biotechnology, electronic equipment, computers, telecommunication equipment, aircraft, and helicopters are eligible for a weighted tax deduction of a sum of equal to one and one-half times of any expenditure incurred on scientific research (not being expenditure in the nature of cost of any land building) as approved by the prescribed authority i.e. Secretary, DSIR. In case of dispute, Secretary, DSIR is also the prescribed authority in concurrence with Director-General of Income-tax (Exemption) for deciding cases of R&D expenditure made on Capital Equipment and related R&D activities under Section 35 of Income-Tax Act, 1961 referred by Central Board of Direct Taxes.
A few more incentives introduced by the Government to encourage R&D by industry include write off of revenue and capital expenditure on R&D, weighted tax deduction on sponsored research programs of the industry with National Laboratories/Universities /IITs; accelerated depreciation allowance on plant and machinery set up indigenous technology, custom duty exemption on goods imported for use in Government-funded R&D projects, excise duty waiver for 3 years on goods produced based on indigenous technologies and duly patented in any two of the countries out of India, European Union(One Country), USA and Japan.
Scientific & Industrial Research Organizations in the area of Medical Agriculture, Natural and Applied Sciences and Social Sciences recognized by DSIR are eligible for notification under Section 35 (1) (ii)(iii) of I.T Act 1961 and also for availing Custom and Excise duty exemption.
Commercial R&D companies approved by DSIR before 1st April 2004 are eligible for 10 years tax holidays. A comprehensive list of projects supported by DSIR can be seen here.
Section 35 of the Income Tax Act pertains to Expenditure on Scientific Research, wherein Section 35 (2AB) states that Where a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing (not being an article or thing specified in the list of the Eleventh Schedule) incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred. The term “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on a clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act, and filing an application for a patent under the Patents Act, 1970 (39 of 1970). Furthermore, no deduction shall be allowed in respect of the expenditure mentioned in the above clause under any other provision of the Income Tax Act. The Finance Act, 2016 amended Section 35(2AB) of the Act where it has been provided that the weighted deduction shall be reduced under Section 35(2AB) from 200 percent to 150 percent effective from 1 April 2017 till 31 March 2020. Thereafter, it will be phased out to 100 percent only. Additionally, 100% deduction is available on the expenses incurred on specified scientific research. As per section 35 (1) of the Income Tax Act, the deduction is available for revenue expenditure. However, as per section 35 (2) of the Income Tax Act, the deduction is available for capital expenditure also. The 100% deduction is available in the year in which capital expenditure is incurred. But depreciation is not allowed on this capital expenditure. Further, if the land is purchased, the deduction is not available. For e.g. for scientific research, if a machine is purchased or for a laboratory an air conditioner is purchased then in that year 100% deduction of it can be availed. Further expenses incurred in earlier three years before starting a business are also allowed for deduction. It means for starting a new business these provisions are beneficial.
Additionally, the relatively new section 115BBF provides that where the total income of the eligible assessee includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of ten (10) percent. An eligible assessee would mean a person resident in India, who is the true and first inventor of the invention and whose name is entered on the patent register as the patentee in accordance with Patents Act, 1970 and includes every such person, being the true and the first inventor of the invention, where more than one person is registered as patentee under Patents Act, 1970 in respect of that patent.
Section 10AA of the Income Tax Act also additionally provides for income tax deduction to SEZ units to the tune of 100% of export profit for the first five years, 50% of export profit for the next five years, and amount not exceeding 50% of export profit is eligible for deduction for the next five years. The condition for allowance of the deduction is that the same has to be debited from the Statement of Profit and Loss, and credited to ‘Special Economic Zone Reinvestment Reserve Account’. Also, Section 10AA deduction is allowable from the assessment year relevant to the previous year in which SEZ unit commences its manufacturing process or commences provision of service, as the case may be.
Multiple schemes from the Govt. of India also involve the setting up Boards and Bodies that grant loans and/or grants to Research entities, a few of which are mentioned on the above-shared link of DPIIT. Few exemplary grants include Finances available from the Technology Development Board (TDB), Techno-entrepreneurs Promotion Programme (TePP) (handled by DSIR), and the New Millennium India Technology Leadership Initiative (NMLTLI supported by CSIR) (more information here). For instance, TDB provides financial support through various modes, such as through a loan of up to 50% of the project cost at simple interest with repayment in five years after project completion, participation in the equity of companies up to 25% of paid-up capital, and Grants-in-aid. More details on the specifics of the schemes can be seen here.
Additionally, many state-level policies, as also mentioned above in the DPIIT link have been introduced to set up new units and expand existing units to develop infrastructure, education, and employment opportunities. For these purposes, states have started offering many investment-linked incentives and location-linked incentives. The types of incentives offered to include stamp duty waivers and concessions; soft loans and exemptions; and subsidies linked to social security contributions. Incentives may be offered to specified industry sectors based on the size of the eligible investment, location, employment generation, nature of products, etc. No specific plan is provided for R&D; however, R&D companies are eligible to apply. The incentives offered may vary from state to state (under respective state industrial policies) with customization for megaprojects or investment in underdeveloped areas based on negotiations with the relevant State Government.
Central Board of Indirect Taxes and CustomsBenefits of concessional customs duty and GST (including customs and GST incentives in the form of exemptions and concessional rate of tax), has also, over a period of time, issued necessary guidelines and notifications in this regard. Some of them include but are not limited to, Customs Notification No. 50/1996, dated 23 July 1996 (as amended from time to time), Customs Notification No. 51/1996, dated 23 July 1996 (as amended from time to time), GST Notification No. 45/2017-Central Tax (Rate), dated 14 November 2017, GST Notification No. 45/2017-Union Territory Tax (Rate) Tax, dated 14 November 2017, and GST Notification No. 47/2017-Integrated Tax (Rate) Tax, dated 14 November 2017. Owing to such notifications and other allied/associated policies, GST at a concessional rate is applicable on specified goods supplied to specified research institutions. Further, the suppliers would be required to obtain relevant certificates and approvals from such research institutions to claim the exemption. The concessional rate of GST is available subject to fulfillment of specified conditions including that: the institution must be registered with the Government in the DSIR, and the head of the institution issues the certificate to the supplier of the goods being essential for research purposes and would be used for stated purposes only, and that the goods should not be sold or transferred for a period of five years from the date of installation.
In sum, there are numerous avenues currently available, not only to save onto the taxes, but also to optimally utilize/apportion revenue/expenditure owing to R&D, and additionally also to opt from amongst numerous schemes available to obtain loans, grants, benefits, and credit for comprehensively carrying our R&D activities. It’s just a matter of a good hand-holding of R&D-oriented entities so that they utilize these available opportunities for intended benefit.