Implication of new corporate tax cut on scientific research

The sudden introduction of reduced corporate tax rate for existing companies to 22% plus surcharge under section 115 BAA has dealt a severe blow to scientific research in this country not only affecting companies but IITs, Government research labs, deemed universities and private technology institutes as well.

The implication for companies availing reduced corporate tax rate wrt scientific research is as follows:-

a. Section 35 (2AB): Will not be able to claim weighted tax deduction at 150% for capital and operating expenditure for scientific research carried out in DSIR approved research laboratories but will 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)

b. Section 35 (2AA): Tax deduction of 200% provided for research funding to Indian Institute of Technology, Government Research Labs and Universities

c. Section 35 (ii): Tax deduction of 175% for carrying out scientific research at research association, universities and college

d. Section 35 (iia): Tax deduction of 125% for carrying out scientific research with companies

e. Section 35 (1)(iii):Tax deduction of 125% for carrying out social or statistical research with research association, universities or colleges 

This will put immense pressure on research labs, IITs and colleges involved in scientific research to raise funds for research with a silver lining whereby CSR funds can be provided for research to eligible incubators, research labs and colleges by companies as per the latest amendment.
So it is time to get inventive and find ways to fund raise for research as also focus on technology commercialisation and industry partnerships given the policy constraints.
The message is loud and clear, time to wake up and find ways of sustaining your R&D!

Will the Government’s Revised Corporate Tax Cut Policy cull innovation in India?

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 1st 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.

Bold move, need a bolder move for R&D

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.

There is hope for R&D 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.

Confused how to avail income tax benefits for your R&D spends? Do it in 3 steps!!

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.

Special Tax Incentives for Manufacturing in India

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.

Why are software companies not claiming R&D Incentives outside India?

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 do 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??

How to file form 3CL with DSIR?

As the deadline for filing your R&D Expenditure (Form 3CL) with DSIR is approaching soon for financial year 2018-2019 it is time you gear up for the same.

Section 35(2AB) of the Act provides weighted tax deduction of 150% of expenditure incurred by a company, on scientific research (not being expenditure in the nature of cost of any land or building) in the in- house R&D centres as approved by the prescribed authority.

The Department of Scientific and Industrial Research (DSIR) has recently updated the guidelines for approval of in-house research and development (R&D) centres and submission of prescribed report under section 35(2AB) of the Income-tax Act, 1961 (the Act). Section 35(2AB) of the Act.

Upon receiving recognition from DSIR as IN-HOUSE R&D UNIT, companies are eligible for definite tax benefits u/s 35 (2AB). To avail these benefit, filing of form 3CL is mandatory. The cutoff date for the documents to be submitted for availing 3CL benefits is 31st October of each preceding financial year of approved period to facilitate submission of Report in Form 3CL.

Required information to be filled in form 3CL

  1. Name and Address of the registered company including Telex/Fax/Phone numbers
  2. Permanent Account Number (PAN) of the company Name and designation of the Principal Officer of the company.
  3. Nature of Business, manufacturing details of products Drugs like Pharmaceuticals, Electronic Equipment or any other article or thing notified under sub-section (2AB) of section 35.
  4. Annual production of the eligible products of the company during the past three years.
  5. Proposed objectives of scientific research contemplated by the company.
  6. Whether the nature of the business is related to the proposed objectives of the scientific research contemplated by the company.
  7. Details of the nature of in-house R&D facilities.
  8. Whether recognition granted to the in-house R&D centre of the company by DSIR.
  9. Total cost of in-house research facility, giving break-up of expenditure on land and buildings.
  10. Agreement for co-operation, R&D facility, audit of the accounts maintained for that facility.

 Along with it, documents like Auditor’s Certificate, complete details as per appendix II to annexure IV of DSIR guidelines are required as well.

 FORM 3CL is needed to be filed to DSIR and a FORM 3CLA (to be filed by the auditor) to Director General of Income Tax.

 With this, the process of availing the income tax benefits is completed!

Please Don’t Neglect R&D, Finance Minister.

R&D incentives is a key tool used by Governments globally to promote innovation, create high paying jobs and simulate industry growth with countries like United States of America which has made the R&D Tax credit policy permanent in 2016 recognising the impact it has on economic growth of the country.
India is at the cusp of start up growth as also industries has seriously started investing in Research & Development over the last 5 years to leverage market opportunities, address environmental concerns and create indigenous technologies which is a must for India to become an economic superpower.
Unfortunately the Government policy making towards R&D incentives has been short sighted and temporary making it hard for serious investors to invest in R&D to plan long term as also for SMEs who are now gearing  up to make substantial investment in R&D to create new products and technologies for disrupting the market.
The R&D tax benefits is granted in India based on getting certification from Dept. of Scientific & Industrial Research (DSIR) which can easily take one year or more as also the scheme is tied to the physical location of the company whereas globally the incentives are project based which is flexible, transparent and quick to implement.
In fact despite being in middle of recession for last few years European Union (EU) has been significantly increasing incentives in R&D and their Vision 2020 program has already been envisaged beyond 2020 as investing in innovation is the only way to increase growth and create jobs.
India needs to take a holistic view of R&D incentives as a policy making tool which can stimulate growth and make India an attractive R&D destination.
***
Rajeev Surana is a Patent Attorney and author of Protect Your Ideas book. He is also an avid marathon runner and been deeply involved with the innovation ecosystem in India. He can be reached on rajeev@scinnovation.in

Top reasons for rejection of DSIR Recognition

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