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The Finance Ministry took corporate sector by surprise by slashing the basic corporate tax.
The revised corporate tax will provide a reduced rate of tax of 22% (Existing) and 15% (For new manufacturing companies only w.e.f 1^st Oct, 2019) plus applicable surcharge. These amendments will come into effect from the Financial Year 2019-20.

While it brings relief to the corporate sector, there is a catch.
These revised tax rate will only be applicable to companies who are not receiving any kind of incentives from the government. Also, once the company switches to the revised scheme it won’t be able to switch back to the earlier one.

This comes as a huge blow to the companies that are availing research incentives U/S 35 (2AB).

The new section 115 BAA prohibits availing tax deduction under section 35 (2AB) which includes availing capital and operating expenditure for scientific research at 150% excluding land and building and hence if you decide to avail lower corporate tax rate at 22% then you cannot avail section 35 (2AB) benefits for both capex and opex for R&D applicable even for FY 2019-2020 if a company decides to switch to the lower corporate tax U/S 115 BAA.

Companies will still be able to claim 100% deduction on operating expenditure u/s 35 (1)(i) and capital expenditure u/s 35(1)(iv) along with 35(1)(2ia) on scientific research.
Also if it is a company is newly incorporated it can also claim operating and capital expenditure at 100% for the last 3 years clubbed together in the previous year by getting it approved from DSIR.

Please note you will be able to avail both capex U/S (35 (2ia)) and opex at 100% of your spend.
Refer to:
https://incometaxindia.gov.in/Acts/Income-tax%20Act,%201961/2013/102120000000027479.htm

Innovation is a sign that a country is prosperous, and R&D is the backbone of innovation.
Taking away incentives for conducting research will not only discourage companies from doing R&D but also be detrimental in the long run to the economy which is already going through a slowdown. By not incentivising Research & Development; the whole purpose of the “Make In India” initiative will be defeated.

The government should reconsider the decision & treat R&D incentives separately from other forms of incentives. A welcome step has been extending the scope of CSIR spent on research by including publicly funded research institutes and incubators in the country which should lead to stronger industry academia collaboration.

The unexpected cut today in corporate tax to 22% excluding surcharge by the Finance Minister on 20th Sep. applicable for FY 2019-20 is a bold move to simulate investments especially for new manufacturing companies which has been bought down to 15% excluding surcharge.
The FM and PM mentioned that it would lead to a stimulus to Make in India but we also need increased incentives for R&D for which the weighed tax deduction should be increased and the scheme made permanent so that there can be increased investment in Design & Development in India.

As we all are aware Income Tax benefits u/s 35 (2AB) pertaining to DSIR approved companies which have received Form 3CM with tax deduction of 150% is scheduled to be wound down to 100% by end of FY 2019-20 i.e. 31st March 2020 and it has the entire manufacturing and research based companies aghast at this move.

On one hand we talk of Make in India but on the other hand there is no financial incentive to Design & Develop in India?
We have been trying to get the voices of the Industry & Research community including international partners to the Government so that they can understand the sheer loss of growth, highly skilled jobs and innovation in this country if we go down that path.

The Founder of SCPL, the parent company of DSIR.in had an opportunity to meet the Principal Scientific Advisor (PSA), Prof. Vijay Raghavan to Govt. of India in last week of August 2019 whereby the industry view and international practices around R&D incentives was shared with him and his team.

He sounded cautiously optimistic and mentioned that they are working with the Finance Ministry to find a way out and restore the R&D incentives provided to Industry.
All is not lost and there is still hope for R&D in this country.

It’s that time of the year when you are finalising your company Income Tax returns and have no clues how to avail income tax benefits for your R&D expenditure although you have your DSIR approval i.e. Form 3CM in place.

Step 1: Prepare a list of all eligible capital and operating expenditure for previous Financial Year 2018-19 in the format as per Form 3CL

Step 2: Get it certified by your statutory auditor
 
Step 3: File Form 3CL with DSIR physically and online with Income Tax site along with your IT return copy.

Don’t have the expertise or the time to accomplish the same?
Call DSIR.in helpline number and we will assist you in professionally filing your Form 3CL in time with maximum tax benefits and importantly no undue claims which may be disallowed by DSIR.

SCPL, the parent company of DSIR.in has experience of handling 3CL filings for companies of all sizes with expenses ranging from 50 lac to 100 crore and has handled 3CL filings with R&D expenses in excess of Rs.500 crore.

Overview

Manufacturing has emerged as one of the high growth sectors in India targeting global markets and are becoming formidable global competitors. India has jumped 30 places to reach the 100th spot in the World Bank’s “Doing Business Report 2017” and has been one of the top improvers. The country is expected to rank amongst the top three manufacturing destinations by 2020. Manufacturing sector is estimated to touch USD $1 Trillion by 2025 accounting for about 25 – 30% of the country’s GDP, creating up to 90 million jobs domestically. The Government of India has set up an ambitious plan of locally manufacturing around 181 products. This along with digital push could be a big catalyst to sectors such as power, oil & gas, automobile manufacturing.

In recent years, the Indian government has implemented a number of tax incentives for manufacturers. These incentives were created by the Make in India program and the Goods & Services Tax (GST), which are expected to increase the nation’s share of the global electronics manufacturing market.
The Make in India Program, established in 2014, provides
new incentives aimed at promoting investment, fostering innovation, and protecting intellectual property.
In 2017, India’s GST program was launched and it provides a uniform, transparent tax code. The goal of both programs is to create more jobs across the country and across many industries that have often been outsourced across the globe. India’s Manufacturing Tax Incentives

The tax incentives are designed to attract investors to the Indian manufacturing sector while increasing the job market and improving the Indian economy. They fall under several different categories, including tax holidays and credits, rebates, and investment allowances.
There are other tax incentives that vary based on industry, region, and other criteria.

Activity Incentives: These incentives are for any manufacturers and producers fulfilling certain conditions. They provide a 150% deduction on on-premises research and development, as well as funding the importation of any materials needed for these activities. Eligible manufacturers and producers also qualify for an exemption of customs duty.

Exportation Incentives: These incentives tend to offer rebates or waivers from charges and fees related to exportation and purchase of goods within a Special Economic Zone (SEZ). This includes exemptions of customs duty, VAT, excise duties, and Service Taxes. These incentives are incredibly attractive for exporters, as they can cut back significantly on their operation, transport, and sale costs and fees. These
incentives also offer to deduct 100% of a manufacturer’s export profits for the first 5 years of participation. This drops to 50% for the second 5 years and stays at 50% for another 5 if profits fulfil certain terms and conditions, including going to a special account for the purpose of buying manufacturing equipment.

Industry Tax Incentives: These tax incentives fall within specific industries that have unique or specific needs and requirements. The incentives supply tax deductions or direct reimbursement of many industry-incurred expenses, such as material storage and other necessities. They might also include the costs associated with running a hotel, developing a housing unit or sector, building a specialty transport system for
unique materials, or maintaining specialty storage units for sensitive food- and medical-grade materials. Eligible manufacturers in these industries will receive incentives in the form of tax deductions or repayment equalling 100% of the total fees associated with running their company.

Investment-based Incentives: In order to attract investment in specified sectors and to boost the exports, these incentives are offered on the investment made by the industries. The Government offers capex subsidy of 20-25% and grant-in-aid of 50- 75% of the total project cost for those companies meeting the criteria.

State-Based Incentives: These incentives can vary significantly from state to state. The states in north eastern India have a set of tax incentives for manufacturers. These vary based on the available industries, region size, investment potential, and the products produced in the region, among other considerations.
Incentives might be tied in to the land on which the manufacturing process takes place. These incentives might include waivers or permissions related to registration fees, stamp duties, property taxes, or more. If they’re related to the business infrastructure, they could include rebates or waivers on duties and tariffs related to utilities or subsidies on equipment related to manufacturing or clean air.

Tax Incentives For Infrastructure Development Undertakings
Enterprises engaged in the business of power generation, transmission, or distribution; developing or operating and maintaining a notified infrastructure facility, industrial park, or SEZ; substantially renovating and modernising the existing network of transmission or distribution lines (between specified periods); or laying and operating a cross-country natural gas distribution network are eligible for a tax exemption of 100% of profits for any ten consecutive years falling within the first 15 years of operation (first 20 years in the case of infrastructure projects, except for ports, airports, inland waterways, water supply projects, and navigational channels to the sea).

Tax Incentive Of Capital Expenditure On Certain Specified Businesses
Deduction of capital expenditure is allowed at 100% in the year when the commercial operations begin in respect of the following specified businesses:
Setting up and operating cold chain facilities.
Setting up and operating warehousing facilities for storage of agriculture produce.
Setting up and operating an inland container depot, freight station, or warehousing facility for storage of sugar, beekeeping, and honey and beeswax production.
Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such a network.
Building and operating a hotel of two-star or above category in India.
Building and operating a hospital with at least 100 beds.
Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the government.
Developing and building specified housing projects under an affordable scheme of the central/state government.
Investing in a new plant or newly installed capacity in an existing plant for production of fertiliser.

Conclusion
A clear strategy for securing incentives should be built into any investor’s game
plan. India offers many attractive tax benefits, we advise working with a professional
firms like us which is familiar with India’s regulatory environment. We can help
businesses identify all relevant tax breaks and incentives and draft a step- by-step guide
outlining the application process.

In brief The Department of Scientific & Industrial Research (DSIR) is operating a scheme for granting recognition & registration to in-house R&D units established by corporate industry.

The in-house R&D units applying for recognition to DSIR are expected to be engaged in innovative research & development activities related to the line of business of the firm, such as, development of new technologies, design & engineering, process/product/design improvements, developing new methods of analysis & testing; research for increased efficiency in use of resources, such as, capital equipment, materials & energy; pollution control, effluent treatment & recycling of waste products or any other areas of research.

Market research, work & methods study, operations & management research, testing & analysis of routine nature for operation, process control, quality control and maintenance of day to day production, maintenance of plant are not considered as R&D activities.
The Department of Scientific and Industrial Research (DSIR) has recently started to release the list of companies who get recognized by DSIR, closed by DSIR and who withdrawn their application.
Over all, only about approx. 2000 companies are recognised by DSIR in India at this time, which is miniscule considering there are about 7000 companies listed in Bombay Stock Exchange (BSE) and there are about 1.5 million SMEs in India.

This directly points to the lack of awareness of this scheme and how companies that believe they don’t do R&D or have a proper set up can benefit by this scheme.
From the recent list we can see that four out of five companies who applied for recognition get rejected due to lack awareness of R&D activities, set up etc.

Eligibility criteria
The basic criteria for DSIR recognition are given below:
 Company should be three years old
 Company should be listed under Pvt Ltd, Public Ltd.
 Company has minimum 1000 sq ft R&D area.
 Company should be involved in new product development, new process development
and improvement of existing process.

Reason for Rejection
The reason for getting rejection from DSIR are many like lack of awareness about R&D
activities, how to show the R&D layout etc. Some of major reason of the same are given below:

1. Company may not have a dedicated R&D Area or set up but it is engrained in the business
   without giving special emphasis to Research & Development.
2. Company may not have clarity on R&D activities which can be allow by DSIR under this
   scheme.
3. Company may not identify the R&D expenses for last three years and not showing in
   application properly.
4. Company may not identify the major ongoing and future projects.
5. Company may not have clarity on future plans for R&D activities and not able to explain to
   DSIR scientist.
6. Company may not have dedicated manpower, area and account for R&D.
7. Company may not shoot proper walk-in video for R&D facility.
8. Company may not show the proper finance figure in the application.
9. Lack of confidence at the time of interview, and not able to explain what kind of R&D they are
   doing in front of DSIR scientist.

Checkpoints of DSIR process:
 Identification of R&D layout and extract the dedicated lab for R&D from existing layout
 Identification of R&D equipments, manpower
 Identification of R&D expenses for last three years
 Identification of R&D achievements for last three years
 Finalization of R&D expenditure
 Internal audit of R&D expenses, if any

The guidelines can be accessed from the following link:
http://www.dsir.gov.in/#files/12plan/bird-crf/rdi_guidelines_201511.html

Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
letstalk@scinnovation.in
Head Office
109, Marine Chambers, 1st Floor, 43,
New Marine Lines, Mumbai-400020. (INDIA)
Phone: +91 9962696204 
Email: letstalk@scinnovation.in