Budget 2010 has doled out a substantial tax break for research & development with the finance minister saying R&D spend in all manufacturing sectors, with the exception of a small negative list, will benefit from tax deduction. A weighted tax deduction of 150% if R&D spend is Rs 100, taxable income is reduced by Rs 150 is right now available to companies in a few sectors like pharma.

Sanjay Kapadia, executive director (direct tax) at PricewaterhouseCoopers said: Earlier, the weighted tax deduction was applicable to only a few sectors. It is a welcome step to open it to other sectors.

Weighted tax deduction benefits companies as it reduces their taxable income and tax liability. The FM has proposed to expand the benefit to all sectors except for those mentioned in the 11th schedule firms producing alcohol, tobacco, cosmetics, toiletries, dental care products and aerated drinks.

Naveen Aggarwal, ED (direct tax) at KPMG, commented: The proposal has a much wider coverage and is going to encourage innovation and entrepreneurs. It is going to benefit industries like software, which have captive R&D units in India but were not eligible for tax deduction. It is also going to give a push to the manufacturing sectors that are involved in developing new designs.

Said R Chandrasekaran, president and MD, global delivery, Cognizant: A substantially higher outlay should increase the R&D throughput and innovation quotient in a material way. The pharma industry is pleased that it has been extended. It had actually made a representation for the tax deduction to be increased to 200%. The fact that the FM has expanded the scope to include more sectors is a good thing, Mr Kapadia said.