India:
Union Budget 2016-17 Proposes Steps to Encourage Domestic Patent Regime
New
Delhi February 29, 2016
The
much awaited Indian Union Budget 2016-17 was presented by the Hon’ble Indian Finance
Minister, Mr. Arun Jaitley in the Indian Parliament on February 29, 2016.
The
Budget broadly focuses on issues regarding tax, healthcare, education, energy,
investments, infrastructure, agriculture and banking. The Indian Government has
proposed a nominal GDP growth rate of 11%, that is, real growth plus inflation,
for the year 2016-17 in the Budget. Direct
and Indirect Tax Dispute Resolution Schemes are also being introduced for cases
in litigation. It also proposed to provide a deduction of 100% of the profits
and gains derived by start-ups
involving
innovation development and processes or services driven by technology or
intellectual property.
The
benefit of a 100% tax exemption for 3 years will be available to all eligible
startups, that is, those which are set up before April 1, 2019. As per the
Start Up India: Action Plan, a startup is defined as an entity (private limited
company, registered partnership firm or limited liability partnership) that
aims to develop and commercialize a new product/service/process or a
significantly improved existing product or service or process, that will create
or add value for customers or workflow. The annual turnover should also be less
than INR 25 crores. In order for a ‘Startup’ to be considered eligible, the
Startup should be:
- Supported by a recommendation from an Incubator established in a post-graduate college in India or,
- Supported by an incubator which is funded by the Government as part of any specified scheme to promote innovation or,
- Supported by a recommendation from an Incubator recognized by the Government or,
- Funded by an Incubation Fund/Angel Fund/ Private Equity Fund/Accelerator/Angel Network registered with SEBI endorsing the innovative nature of the business or,
- Funded by the Government as part of any specified scheme to promote innovation or,
- Having a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
Unfortunately,
the last criteria of eligibility regarding patents proves to be a shortfall in
the context of the 100% tax exemption. This is so because it takes years for a patent
to get granted, by which time the entity would no longer be able to avail the
tax exemption, hence, leaving a question mark on the practicality of the said provision.
Introduction
of a New Section in the Income Tax Act for Income from Patents
A
major highlight of the Budget is that it also proposes a special patent regime
where the existing 30% tax is reduced to 10% on income from the worldwide
commercial exploitation of patents developed and registered in India. For the
same purpose, it has been proposed that a new
Section, that is, Section 115BBF, should be inserted in the Indian Income Tax
Act, 1961, to provide that where the total income of the eligible assessee’s
income includes any income by way of royalty for a patent, developed and
registered in India, such a royalty shall be taxable at the rate of 10% (plus
applicable surcharge and cess) on the gross amount of the royalty. These
amendments are stated to come into effect from April 1, 2017, and will apply
from the assessment year 2017-18.
Current Situation
Currently,
a tax of 30% is being levied on a person owning a patent registered in India
and exploiting it abroad as per the existing corporate tax and income tax laws.
This is a burden on innovators and hampers the innovation process. The Budget
has tried to overcome this shortfall in the Indian laws in order to make India
the ‘next big thing’ when it comes to patents and to bring India to a level
playing field as all other advanced economies of the world.
Changes in the Existing System
The Budget proposes that, now an income tax of
10% will be levied on a resident of India owning a patent developed and registered
in India and exploiting it abroad instead of 30 % as earlier. The
move aims to encourage research and development (R&D) in the country and is
in consonance with the Start Up India initiative that the ruling Government in
India is trying to promote. As per the Budget, only a
resident, that is an individual or a company can avail of such a benefit. As per
the provisions of the Income Tax Act, 1961, a resident can
either be a:
- An individual - If in the previous year, he was either present in India for a period amounting in all to 182 days or more or was present in India for a period amounting in all to 60 days or more in the previous year, provided that he has been present in India for a period amounting in all to 365 days or more during the 4 years immediately preceding the previous year.
- A company - If it is considered an Indian company, whether its control and management is in India or abroad, wholly or partially, or a foreign company, if its place of control and management is wholly situated in India only.
Pharma companies are expected to
benefit from the aforesaid push to patents. Large Indian and global drug makers
are set to benefit from the Budget announcement of a 10% tax rebate on the
earnings from global patent filings. The move may help Indian drug makers such
as Sun Pharma, Dr. Reddy's, Lupin and Wockhardt, among others, who are
expanding their global businesses through new drug filings. “Research is the
driver of innovation and innovation provides a thrust to economic growth”, Mr.
Arun Jaitley noted in his speech. Wockhardt Chairman, Mr. Habil Khorakiwala,
also lauded the step by saying that it will spur innovation and manufacturing
in India. Mr. D. G. Shah, Secretary General of the Indian Pharmaceutical
Alliance (IPA) reportedly stated that the flat corporate tax structure of 25%
on companies which commence production after 2016, will also give a boost to
the drug manufacturers who might want to set up new manufacturing facilities.
Benefits of the Provisions
In
order for an entity to gain the aforementioned advantage, it must fall within
the definition of a ‘resident’ as per Section 6 of the Indian Income Tax act,
1961. So, Indian individuals and
companies will get an incentive to operate in India instead of moving abroad,
hence, tackling the problem of brain drain, thus, creating employment
opportunities and promoting economic growth. The introduction of the new provision will encourage
indigenous R&D activities in order to make India a global R&D hub. Therefore,
the Government has decided to introduce this new concessional taxation regime
for income from patents. The aim of this provision is to provide an additional
incentive for companies to retain and commercialize the existing patents and
develop new innovative patented products.
Budget
and the E-Commerce Sector
India
has allowed 100% foreign direct investment (FDI) in e-commerce with the
restriction that companies can engage only in B2B e-commerce activities, that
is, the trade taking place between a manufacturer and a wholesaler or a
wholesaler and a retailer. The current FDI policy does not allow FDI in retail
e-commerce activities, that is, B2C commerce, that is the trade taking place
between a retailer and a consumer. The Department of Industrial Policy and Promotion
had suggested that 100% FDI should be allowed in the market place model
e-commerce activities and was reportedly working on guidelines for the same.
The Budget was being eagerly awaited as it was expected that FDI would be
introduced in retail e-commerce activities as well. But the Budget disappointed
many e-commerce giants by not incorporating any provisions in this regard. This
was one of the very few points of the otherwise pro-business Budget that were
not received very well.
Concluding Remarks
The steps proposed in the Budget are
pro-economic growth, giving special emphasis to the ‘Make In India’ vis-à-vis
‘Start Up India’ initiatives launched by Prime Minister Mr. Narendra Modi in
recent times. If implemented effectively, India is sure to go up as a hot
destination for business investments.
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