Only 1,800 companies are availing R&D tax benefits in India
The word R&D is typically confined to large companies with big budgets and a large technical team supporting new product or process development in the organisation.
This is far from true because a large number of small and medium businesses have been doing R&D by solving customer problems and innovating on their products without realising the same.
Because they may not have a dedicated R&D lab or set up, but it is engrained in the business without giving special emphasis to Research & Development.
But there are financial and strategic benefits available for those conducting R&D in India; be it product or technology development across different industry sectors, and the sooner they realise it the better it is for them.
There is an ongoing scheme by the Department of Scientific & Industrial Research (DSIR) under Ministry of Science & Technology. This scheme recognises R&D departments of manufacturing companies and provides them the status of ‘inhouse R&D centre’, which in turn provides them with indirect and direct tax benefits for their R&D activities.
This is to incentivise these companies taking risks by investing in R&D, which can lead to development of indigenous technology and new products benefiting society.
The benefits range from zero customs and excise duty for purchase of R&D capital equipments on receiving R&D recognition certificate to income tax benefit for capital expenses (CAPEX), which includes computers and equipments for prototyping, testing, etc., and operating expenses (OPEX), which includes salaries of technical and scientific staff including their official travel, raw materials consumed, maintenance of equipments, utility bills and other relevant expenses incurred on running the R&D centre under section 35 2(AB) of The Income Tax Act with 200 percent weighted deduction for FY 2016-17, but the same has been decreased to 150 percent from April 1, 2017, as announced in the Union Budget in February 2016.
There is also an interesting benefit. If a product has been patented in two countries, which could be from India, USA, Japan or European Union, and has been launched in India, then it will be eligible from excise duty waiver.
It has also been interestingly seen that companies go for DSIR recognition and approval for strategic reasons beyond financial benefits. In one such case, the Customs Department suggested a Korean pharma company conducting drug discovery in India to avail DSIR recognition so that their consignment does not get delayed in customs. Even a few days delay can be catastrophic for their research projects.
In other cases, it was seen that companies were unable to avail funding schemes from Government of India or other bilateral funding programmes from agencies such as Department of Biotechnology or Global Innovation & Technology Alliance (also known as GITA) since they didn’t have DSIR recognition, which is a mandatory requirement for a number of such funding schemes.
One cannot over emphasise the prestige factor attached to DSIR accreditation, as only 23 percent of the companies who applied for DSIR recognition in the year 2014 and 2015 were successful. Simply put, three out of four companies who applied for recognition get rejected due to lack of understanding of the scheme and expertise to complete the entire application process, which is stringent and can stretch up to six months from start to finish.
In our personal experience, a large Indian public listed company that was advised by a law firm was rejected despite having a full fledged R&D set up in place due to their inability to correctly advise the company. And we could get the company recognition with proper planning, which was appreciated by the company’s top management.
Overall, only about 1,800 companies are recognised by DSIR in India at this point in time, which is miniscule considering there are about 6,000 companies listed in Bombay Stock Exchange (BSE) and there are about 1.3 million SMEs in India.
This directly points to the lack of awareness of this scheme and how companies that believe they don’t do R&D or have a proper set up can benefit by this scheme.
Keywords: DSIR recognition, Section 35 2(AB), R&D tax benefit, zero custom duty, zero excise duty, R&D incentive, exemption
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)