Deloitte in India has recently launched a paper on ‘Research & Development expenditure’ that focuses on the development of R&D in India and tax benefits and incentives being provided for its growth. According to the paper, India is on a path to become a technology driven superpower in the coming years. The country's large talent pool of engineers and scientists is the driving force behind this transformation. Comparative lower cost of the talent pool is perceived as an added advantage.
Governments across the world recognise that increased R & D is an absolute necessity for the development of economy. However, given the uncertainty of R & D projects, investments in R & D may not necessarily bring in immediate benefits to the entities carrying out research. Further, investments in certain areas of R & D, may be strategically important to the country, say for instance research in Defense areas and environmentally beneficial projects. But these may not be high on the priority of corporates, given the long gestation periods. Fiscal benefits on R & D are therefore very relevant, and act as incentives to corporates to take up R & D. Countries, world over, attract R & D investments by providing benefits in the form of Tax credits, super deductions, tax exemptions, grants, etc. Certain countries provide wage bill credits as well.
MNCs are setting up dedicated and independent R&D centres for shoring up research activities in the emerging areas of high tech designs, electronics and even pharmaceutical sector. Generally, MNCs prefer to set up captive R&D centres for their overseas entities. This is a major driving force behind India becoming an R&D powerhouse. More than 300 MNCs have setup their R&D centres in India.
Benefits of R&D investments in India
India has one of the most favourable tax regimes for R&D. The benefits are in the form of Direct tax benefits, Indirect tax benefits and state government incentives. Currently these benefits are available to contributions made to specified institutions and expenditure incurred on in-house R & D centres of manufacturing entities. Indirect tax benefits are available for recognised R & D centres as well.
The rates of super deductions in India are comparable with those across the globe. Till FY 2009-10, the benefits were restricted to manufacturing companies in certain specified sectors only. As a result the flow of foreign R&D is mainly concentrated in areas such as electronics and telecommunication, software development, auto design, drug design and pharmaceuticals, hardware and product design. But now, benefits are broad based benefiting all manufacturing companies. The super deduction has been enhanced to 200% from the earlier limits of 150% as well. We are broadly travelling in the right direction.
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The super deduction is available both on capital as well as revenue expenditure. During the starting up stage, companies would have high amount of capital expenditure, in the form of investments in the R & D facilities and equipment. These could be entitled to the super deduction of 200%. It needs to be kept in mind that investments in land and building are not entitled to the increased super deduction of 200%. From the indirect tax perspective, import of capital equipment by recognised R & D centres could be eligible for customs duty exemptions as well.
Under the DTC, the current benefits will be continued and are likely to attract more investments resulting in higher R & D spends in India.
According to a Deloitte’s spokesperson, “India is a strong contender in the field of global R&D. Many MNCs have started considering India as a favourable destination but there is a need for wider policies to attract more investments in this area. Currently, India’s spends on R&D is around 2% of the global spending which is quite less when we look at other South Asian counterparts.”
Talking about tax incentives he added, “Further, the State government incentives are not uniform across all States. From a Direct tax perspective, it needs to be recognised that captive R&D centres bring in a high amount of employment, and R&D infrastructure into India, and this needs to be encouraged. Currently, these units do not seem to be receiving enough incentives.” Relevance of the white paper
There is a noticeable shift in geographies of R & D investments, with greater focus on the Asian region. Understanding the fiscal benefits available for R & D expenditure in India is therefore of prime importance, and companies should be aware of these while strategising their decision on R & D investments. It is interesting to note that there are no conditions prescribed with respect to location of patents in India, what is required is that the R & D activity should be located in India, the costs need to be incurred in India, the benefit of R & D should be utilised in a manufacturing set up in India.
The companies need to be aware that the disclosure of R & D expenditure in the annual report assumes significance in claiming the tax benefits since a high degree of reliance is placed on these by the authorities while certifying the expenditure. The accounting practices could also have an impact on the tax benefits, where the company is covered under MAT (Minimum Alternate Tax) where the book profits assume significance.
R&D spend in India
Investments in research, until recently, lagged behind that of China, the European Union and the U.S. The Indian government has made concerted efforts to drive investments in S & T and this is reflected in the five-year plans. The XI Five Year Plan (2007-12) has ambitious programs and covers:
• substantial stepping up of support to basic research,
• enlarging the pool of scientific manpower,
• strengthening S&T infrastructure,
• implementing selected national flagship programmes which have a direct bearing on the technological competitiveness,
• establish globally competitive research facility and centers of excellence.
The plan includes a four-fold increase for education over the previous plan. It also targets growth of R&D as a share of GDP from the current levels of 0.9% level to 1.2% by 2012.