R&D tax incentives can spur investments

Is India serious about its research and development (R&D) aspirations? The President, Ms Pratibha Patil, announced 2010-20 as the decade of innovation.

The Prime Minister, Dr Manmohan Singh, has emphasised the need to increase our R&D spend, given our relative positioning, among other things, vis-à-vis China.

Whether it is goods or services, we cannot grow and compete without adequate R&D.

India's approximate expenditure on R&D as a percentage of gross domestic product (GDP) is 0.80 per cent, whereas it ranges from 1.6 to 3.5 per cent in countries such as the US, Japan and China.

Thus, others are spending more on an expanded base! In a recent report, India was ranked 33{+r}{+d} on R&D spend; conversely, the US was ranked 6th.

Sweetening the deal

Whether tax incentives mobilise spending or not is a long, open debate generating questions. It is but natural that business will do what is right for business — no one will spend money if it does not make business sense.

However, tax incentives do help spur spending and investment. They also help in sweetening the deal. Citing our globally leading IT and ITeS industry as evidence, tax incentives went hand in hand as the industry grew over the last few decades. Multinational companies have set up thousands of R&D centres and invested billions of dollars in R&D in China. China provides generous tax incentives for R&D. So do other developed countries like Australia, France, etc. Thus, globally, many governments are encouraging R&D spending and provide corresponding incentives in the form of tax credits, tax deductions and grants. This is evidence that tax incentives help.

To be fair, India has always taken steps to continuously promote R&D, whether through providing tax incentives or other schemes. Competent bodies like the Department of Scientific and Industrial Research and Council of Scientific and Industrial Research help in this direction.

Historically, R&D tax incentives have always been provided, even in the 1922 Income-Tax Act. In 1974, the tax incentives were enhanced under the 1961 Income-Tax Act.

Broad-base benefits

At present, income-tax law provides a weighted deduction of 200 per cent on qualifying R&D expenditure incurred on in-house R&D facility. Also, generally, taxpayers incurring R&D expenditure in the course of their business are eligible to claim 100 per cent of the expenditure as a tax deduction. Additionally, Customs duty benefits are also provided on certain capital goods required for R&D.

Laudably, the Union Budget 2012 proposes to extend the benefit of weighted deduction on R&D expenditure described above for further five years.

If all this benefit is already being provided, where is the gap?

Today, the weighted tax deduction of 200 per cent on qualifying in-house R&D expenses does not cover the all sectors: there is a need to broad-base the deduction, including even services under it.

Standalone R&D entities are not eligible for the tax incentive. Earlier Section 80IB(8A) provided this benefit. This benefit should be reinstated.

A comprehensive R&D tax-incentive regime could drive broad-based investments since tax incentives are also an important element in the decision of a company.

However, in addition to tax incentives, a stronger intellectual property protection and enforcement regime would also be important to make India an R&D hub, leading to more employment and investments that will ultimately fuel growth.

(The author is Partner, Tax, KPMG in India. With inputs from Vijay Gilda, tax manager..)

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