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.
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.