With Indian entities (including Global Corporations having R&D Operations in India) increasingly focusing on Research and Development (R&D), 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 highly welcomed. 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 seen that most entities do not take leverage of the provisions and hence either ends up paying more-than-due tax or fail to take benefits available from the current provisions.

The intent of the instant advisory/note is therefore to try and bring more clarity by highlighting on the available provisions, but it is still recommended that a professional at IIPRD 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 proposition for the entities as they don’t have to compensate the professional separately but only as a percentage of the savings.

One of the most popular schemes is the Startup India Action Plan by the Department for Promotion of Industry and Internal Trade (DPIIT). New entities can register as a startup under this plan, which offers several tax exemptions and incentives:

Tax Exemptions Under Section 80 IAC

Startups recognized under this scheme can apply for tax exemption under Section 80 IAC of the Income Tax Act, 1961. This allows them to enjoy a tax holiday for three consecutive financial years within the first ten years since incorporation.

Tax Exemption Under Section 56

Startups can also benefit from tax exemption under Section 56 of the Income Tax Act, provided their paid-up share capital and share premium do not exceed INR 25 Crore after the proposed issue of shares.

Criteria for Startup Recognition

• Tenure: The entity must be within ten years from the date of incorporation or registration.
• Structure: It must be a private limited company, partnership firm, or limited liability partnership in India.
• Turnover: The entity’s turnover should not exceed INR 100 Crore for any financial year since incorporation.
• Innovation: The entity should work towards innovation, development, or improvement of products, processes, or services, or have a scalable business model with high potential for employment generation or wealth creation.
• Exclusions: Entities formed by splitting or reconstructing an existing business do not qualify as startups.

Intellectual Property (IP) Benefits for Startups

The Startup India Action Plan 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 includes 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.

With a growing focus on research and development (R&D) among Indian entities, including global corporations operating in India, the importance of effectively managing R&D expenditure cannot be overstated. The Department of Scientific and Industrial Research (DSIR) offers significant benefits that can substantially reduce costs for R&D-oriented entities. Organizations registered with the DSIR enjoy exemptions from customs duties on the purchase of various goods essential for R&D activities, such as equipment, consumables, computer software, and prototypes.

GST Benefits

For DSIR-recognized centers, the GST rates on these goods are significantly subsidized:

Imports and Interstate Purchases: 5% GST

Intrastate Purchases: 2.5% GST along with 2.5% SGST

Sector-Specific Incentives

DSIR also provides duty-free import benefits for in-house R&D units in the pharmaceutical and biotechnology sectors, subject to certain conditions. Additionally, in-house R&D units involved in chemical, pharmaceutical (including clinical trials), biotechnology, electronic equipment, computers, telecommunications, and aviation sectors can benefit from a weighted tax deduction of 150% on R&D expenditures, as per Section 35(2AB) of the Income Tax Act, 1961. This deduction includes expenses related to clinical drug trials, regulatory approvals, and patent applications.

Comprehensive R&D Incentives

The Indian government has introduced various incentives to encourage industrial R&D, including:

• Writing off R&D Expenditures: Both revenue and capital expenditures on R&D can be written off.
• Weighted Tax Deduction: On sponsored research programs with national laboratories, universities, and IITs.
• Accelerated Depreciation Allowance: On plant and machinery set up with indigenous technology.
• Custom Duty Exemption: On goods imported for government-funded R&D projects.
• Excise Duty Waiver: For three years on goods produced based on patented indigenous technologies in India, the EU (one country), the 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.

Section 35 of the Income Tax Act pertains to Expenditure on Scientific Research, wherein Section 35 (2AB) states that if 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)within an in-house research and development facility approved by the prescribed authority, then, deduction of a sum equal to two times of the expenditure so incurred, shall be allowed. 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, 1961. 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, a 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 Income Tax Act, the deduction is available for capital expenditure also. 100% deduction is available in the year in which capital expenditure is incurred. However, depreciation is not allowed on this capital expenditure. Further, if a land is purchased, the deduction will not be applicable. For e.g. for scientific research, if a machine is purchased or for a laboratory, an air conditioner is purchased then, a 100% deduction can be claimed in that year. Moreover, expenses incurred during the earlier three years prior to starting a business are also eligible for deduction. This indicates that 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 granted 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 an income tax deduction to Special Economic Zones (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 an amount not exceeding 50% of export profit is eligible for a 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 setting up of 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 (NMITLI supported by CSIR). 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 upto 25% of paid-up capital, and Grants-in-aid. Additionally, many state-level policies 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 include stamp duty waiver 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 mega projects or investment in underdeveloped areas based on negotiations with the relevant State Government.

Central Board of Indirect Taxes and Customs Benefits 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), Customs Notification No. 51/1996, dated 23 July 1996 (as amended), 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 fulfilment of specified conditions such as: the institution must be registered with the Government in the DSIR; and the head of the institution must issue a certificate to the supplier stating the goods are essential for research purposes and would be used only for stated purposes, and that the goods should not be sold or transferred for a period of five years from the date of installation.

Maximizing Benefits for R&D-Oriented Entities

There are numerous opportunities for R&D-oriented entities to save on taxes, optimize revenue and expenditure, and benefit from various loans, grants, and credits available for comprehensive R&D activities. However, navigating these opportunities requires expert guidance to ensure full utilization. IIPRD is dedicated to providing this expertise through our strong team of legal and regulatory professionals, including company secretaries.

Comprehensive Support Services

At IIPRD, we don’t just advise our clients on the benefits of various schemes available to startups and companies in India; we provide full-spectrum support to help them realize these benefits. Our services include:

• Advisory Services: We offer detailed guidance on the numerous tax-saving schemes, loans, grants, and credits available for R&D activities.
• Documentation and Registration: Our team assists clients with all the necessary documentation and registration processes required for these schemes. This includes ensuring all paperwork is completed accurately and submitted on time.
• Follow-Up and Monitoring: We provide ongoing support to monitor the progress of applications, ensuring that all follow-ups are conducted and any issues are promptly addressed.
• Single Point of Contact: For entities looking to take advantage of multiple schemes simultaneously, IIPRD acts as a single point of contact. We streamline the process, coordinating all applications and communications through one dedicated team.

Proprietary Data Management Tools

To further enhance our service, IIPRD uses proprietary data extraction and management tools. These tools allow us to:

• Apply for Multiple Schemes Simultaneously: By managing all applications through our integrated system, we ensure that no opportunity is missed.
• Monitor in Real-Time: Our tools provide real-time updates on the status of each application, allowing us to act proactively and efficiently.
• Ensure Efficient Realization: By keeping all processes transparent and organized, we maximize the likelihood of successful applications and timely realization of financial benefits.

Partner with IIPRD

By partnering with IIPRD, R&D-oriented entities can focus on their core activities while we handle the complexities of regulatory compliance and benefit optimization. Our comprehensive support ensures that you leverage all available opportunities to enhance your R&D efforts and achieve significant financial savings.