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Govt eases tax regime on royalty income of inventors
May, 07th 2016

To encourage more research and development activity in India, the government has made the tax regime for royalty income of inventors more liberal.

The so-called ‘patent box’ regime was announced by finance minister Arun Jaitley in this year’s budget to encourage domestic research and development activity and innovation. It sought to tax royalty income of companies from commercialized patents at a lower rate of 10%, rather than the prevailing tax rate of 30%.

Now the government has brought in amendments to the finance bill to make this regime more friendly, but put in clauses which will ensure that only those that incur expenditure in India benefit from these clauses.

The finance bill was passed by the Lok Sabha on Thursday, with a number of official amendments moved by the government. Subsequently, the finance ministry released an explanatory note on Friday explaining in detail the amendments.

As per the changes made in the patent tax regime, the government has now allowed for deduction of expenditure from income before the calculation of tax. However, if the assessee exercises this option, he will have to stay in this regime for five years. If he decides to opt out before the completion of five years due to lower profits or losses, he will not be entitled to access the concessional tax scheme for five succeeding years.

The benefits of this liberalized regime can now be availed if 75% of the total expenses incurred for developing the patent are incurred by the resident in India.

Jiger Saiya, partner, direct tax at BDO India, said the proposal to allow deduction of expenditure is welcome.

“The original proposal seemed to suggest that all the eligible royalty income would be taxed at a flat rate of 10% without allowing any deduction for expenses. With the amendment, the regime now is made optional at the choice of the resident patentee. However, after opting in, the patentee choosing to opt out of the scheme (due to lower profits or losses in a particular year), would need to weigh its decision well,” he said.

On the 75% expenditure requirement, he said that this clause may disqualify some genuine Indian inventions.

“While this would encourage more innovation in India, this would disqualify cases where part of expenditure on development (say imported equipment, specific research, testing, prototyping, etc) is incurred outside India and such expenditure exceeds 25% of total expenditure. This would fence out some genuine Indian inventions, merely because that part of the development expenses was incurred outside India,” he said.

Separately, the government has also extended tax exemptions given to companies in the field of agriculture by another two years.

It was earlier proposed to be phased out from 2017-18 as part of the government’s road map to phase out corporate tax exemptions but has now been extended till 2019-20.

“Considering the importance and the need for support to agriculture, it is proposed to extend the benefit of weighted deduction under section 35CCC for notified agricultural extension project till 31.03.2020,” the finance ministry note said.

Also, the government has made under reporting of income a wilful default liable for prosecution.

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