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The Government of India is all set to table its Union Budget on 1st Feb, 2020 in the Parliament. It is anticipated that, a bold step will be taken towards reviving the economy through this budget like increase in 80-C, Cap on deductions & rise in tax exemption limit for the citizens. As we are here to discuss our expectations from the government to promote R&D in India, we will also analyze what has been done earlier and what should be done now to promote R&D in India. 

In its previous budget the Government of India reduced the corporate tax rate to 22% (plus surcharge & cess) from 30% for all the existing companies which was a tactical move with a catch. 

The Department of Scientific & Industrial Research (DSIR) offers manufacturing companies, tax exemptions up to 150% for expenses incurred on R&D in their respective field. This exemption let companies to spend more money in their R&D and helps in innovating new technology, product development & related processes. 

The government lowered the corporate tax rate to 22% with a specific clause which says that companies availing any other tax incentives would have to relinquish those including tax exemption Under Section 35 (2AB) for research purposes i.e. R&D. 

This is seen as a major obstacle for companies who are engaged in research work as the new section under 115 BAA excludes availing tax concession under section 35 (2AB) which comprises of expending capital as well as operating expenditure for scientific research at 150% which excludes land and building. In effect, if a company decides to avail lower corporate tax rate at 22% then they cannot claim benefits under section 35 (2AB) for both capex and there is a specific clause on the tax exemption U/S 35(2AB) which will effectively lower the current rate of 150% to 100% by April, 2020. 

Mr. Rajeev Surana, Founder of Scinnovation Consultants recently met Prof. K. Vijay Raghavan, Principal Scientific Officer with apprehensions he had with the specific clause and the way DSIR is functioning. Prof. K. Vijay Raghavan requested SCPL to submit a report on the same. SCPL conducted a survey by gathering opinions from the top people from the Indian industry setup. The results of the survey clearly points to the government to take steps to invest in R&D. 

A CEO of a large pharmaceutical company said “Government should not treat Corporate Tax and Research Incentives in the same way, rather offer additional incentives for doing state of the art research” 

Another R&D Head from Automobile Industry suggested increasing the rate of tax exemption from 150% to 200% 

Having said, we presume the government takes promising measures to promote “Make in India” initiative by providing incentives to companies for innovation in India through research.  

The unexpected announcement of reduced corporate tax rate for prevailing companies to 22% plus surcharge U/S 115 BAA has been a major blow to scientific research in this India by affecting all major manufacturing companies, IITs, Government funded research laboratories, deemed universities and private funded tech institutes.

The consequence of the reduced corporate tax rate with regards to the scientific research is as follows:-

a. Under Section 35 (2AB): Companies cannot claim weighted tax deduction at 150% for Capex and Opex for scientific research being done in DSIR permitted research laboratories but will be able to claim only 100% deduction on Opex u/s 35 (1)(i) and Capex u/s 35(1)(iv) besides 35(1)(2ia)

b. Under Section 35 (2AA): Tax deduction of 200% provided for research subsidy to IITs, Government funded Research Labs and Indian Universities.

c. Under Section 35 (ii): Tax deduction of 175% for doing scientific research at research facilities, universities and college.

d. Under Section 35 (iia): Tax deduction of 125% for doing scientific research with all manufacturing companies.

e. Under Section 35 (1)(iii): Tax deduction of 125% for societal or statistical research with research associations, universities and colleges 

This will lead to massive pressure on research labs, IITs and institutions which are involved in scientific research to raise capital for research whereby CSR funds can be made available for research to entitled incubators, research labs and colleges by companies as per the latest modification.
This is the time to be inventive and invent ways to raise funds for research with main focus on technology commercialization and business partnerships given the policy restrictions. 

The message is loud and very clear, it’s time to wake up and invent ways to sustaining your R&D! 

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 modernizing 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:  

 

1. Setting up and operating cold chain facilities. 

1. Setting up and operating warehousing facilities for storage of agriculture produce.  

1. Setting up and operating an inland container depot, freight station, or warehousing facility for storage of sugar, beekeeping, and honey and beeswax production.
    

1. Laying and operating a cross-country natural gas or crude or petroleum oil pipeline (5) 

1. Network for distribution, including storage facilities being an integral part of such a network. 

1. Building and operating a hotel of two-star or above category in India. 

1. Building and operating a hospital with at least 100 beds. 

1. Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the government 

1. Developing and building specified housing projects under an affordable scheme of the central/state government. 

1. Investing in a new plant or newly installed capacity in an existing plant for production of fertilizer. 

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. 

As we all are cognizant to the fact that Income Tax benefits u/s 35 (2AB) relating to DSIR ratified companies receiving Form 3CM with tax deduction of 150% is slated to be reduced to 100% by end of FY 2019-20 i.e. 31st March 2020 which has got the entire manufacturing and research based companies shocked at this move. 
 
We speak about Make in India but it must be noted that there is no financial motivation to Design & Development in India. SCPL has been trying to get the top executives of the Industry & Research field including global partners to reach out to the Government in order to make them understand the absolute loss of growth, loss of highly skilled professionals and innovation in this country if we decide to go down this path. 
 
The Founder of SCPL, the parent company of DSIR.in met the Principal Scientific Advisor (PSA), Prof. Vijay Raghavan to Govt. of India in last week of August 2019 and the entire view of the industry and global practices about the R&D incentives was submitted to his office. 
 
He was optimistic and revealed that the Government is in fact working with the Finance Ministry to try and restore the R&D incentives provided to Industry. 

 
So we can deduce the fact that still there is hope and not all is lost for R&D in this country. 

When you are finalizing your Income Tax returns and have no inkling of how to claim benefits from income tax benefits for your companies R&D expenditure even though you have your DSIR approval or Form 3CM in hand.

Stage 1: Formulate a list of all the eligible Capex & Opex for the previous Financial Year 2018-19 in the format given as per Form 3CL.

Stage 2: Get all the documents verified & certified by your CA or Auditor.
 
Stage 3: File Form 3CL with DSIR and submit the hard copies physically and file online on the Income Tax site along with your IT returns documents.

If you do not have the proficiency or the time to complete the same…….. 

Please call our DSIR.in helpline number and we will assist with your 3CL filing in time with maximum tax remunerations and most importantly no undue claims which may be rejected by DSIR.

SCPL, the parent company of DSIR.in has an experience of over 15 years in handling 3CL filings for companies of all sizes with expenses ranging from 50 lac to 100 crores and has handled 3CL filings with R&D expenses in excess of Rs.500 crores. 

 

Indian software companies, big and small carry out development projects for clients outside India either onsite at client locations or their development centers based in and outside India.
The question is why most of these software companies not claiming R&D incentives for their research or development work which are eligible for the R&D tax credit in countries of their operation.
Most of the leading economies of the world offer R&D tax credit, be it in Europe, North America, Australia, and Southeast Asia.
The reason is simple, most of them are not aware that software companies can be eligible for R&D tax credit or apprehensive whether they would be eligible for the same.
Did you know who is the largest beneficiary of R&D incentives in the United States of America?  

You would imagine a large industrial company right? No!!!
The answer is Amazon, which saved about USD 400 million in R&D incentives which is also one of the reasons they don’t have to pay corporate tax in the USA.
So the question is how you identify R&D activities and projects which are undertaken by your company.
The answer is to segregate client projects and projects which are not directly linked to client delivery (independent). In client projects, the risk of failure lies with the company which simply means if the project is unsuccessful your company has to bear the cost.
The incentives range from country to country but in most cases, the savings can range from about 15% going up to more than 100%.
This will help you get the extra funding to put in cutting edge technologies in Robotics or AI or NLP which is where the future lies.
So isn’t it time to get started??