By Riaz Thingna, Director, Grant Thornton Advisory Private Limited and Pallavi Talavlikar, Chartered Accountant
India, often referred to as the intellectual capital of the world, is expected to benefit enormously in this knowledge and technology era, with intellectual capital having gained substantial importance the world over.
With the geographical divide blurring and continuing liberalization of the Foreign Direct Investment (‘FDI’) Regulations,global investments into India are increasing in number and value. This raises a very important question-what is the legal and substantive protection afforded to Intellectual Property Rights (‘IPR’) in India?
The answer, thankfully, is encouraging; India today can boast of a well-established legal, administrative, and judicial framework to safeguard IPRs. Over the recent past the promulgation of various laws like The Trade Marks Act, 1999, The Copyright Act, 1957, The Patent Act, 1970 (amended by the Amendment Acts of 1999 and 2002 and 2005), The Designs Act of 2000 etc., has created a foundation for the protection of IPs.
The Government’s vision of making India a preferred jurisdiction for global investments, has culminated in the announcement ofa comprehensive Intellectual Property Rights Policy, which emphasizes the coming of age of the IPR regime in India. On the fiscal front, the Finance Act 2016 gave India its own ‘Patent Box’ regime to incentivise investors.
A new section 115 BBF has been introduced in the Income tax Act, 1961 (‘the Act’), providing a preferential rate of tax of 10% on profits derived from qualified intangible property (‘IP’) with a view to promote Research and Development (‘R&D”) in India. This is contemporaneous to the phasing out of the input based incentives offered to companies engaged in the R&D space in India. Hence, resident tax payers who have incurred expenditure to develop a patent in India will be subject to a preferential rate of tax on royalty income from patents registered under the Indian patent law. No deduction of expenditure shall be allowed in computing income under this regime.
Given the inherent benefits available to India, viz. low operating costs, availability of highly skilled manpower resources, and the more recent easing of regulatory hurdles and FDI limits, the patent box regime is rightly timed.
Also, the alignment of the concessional patent box regime to Action 5 of OECD’sBEPS action plan, which prescribes the nexus approach, will boost investor confidence as the tax benefits are linked to actual expenditure on R&D activities. Eligible expenditure on R&D will excludeexpenditure on ‘in process’ IP’sincurred post acquisition of the IP for further development or expenditure incurred by a company that outsources its R&D to a related party.
The government’s intention to safeguard the IPR regime is univocal butvarious niggling issues need to be addressed to achieve the desired ends to the fullest. At the outset, there is a dying need to spruce up our legal system to provide speedy protection from IP infringement. Another issue arises from the fact that the Act defines royalty to exclude the consideration received from sale of product manufactured with the use of patented process or article. However, such consideration may include a component of IP incomewhich would be eligible for the prescribed preferential tax rate ought to apply. Hence, the Government may consider notifying a methodology to identify the IP component from the total composite income from sale of such manufactured goods.
Further, on the expense side, the tax payer may acquire the patent and further develop the same to make it marketable, which may represent a substantial value addition and hence, there should be a mechanism to consider such expenditure while applying the nexus test.
While the steps initiated to date aresurely positive, on the negative side, it may be pointed out that the preferential tax rate which is only applicable to patents should be also extended to other intellectual property rights. The government has undoubtedly set its vision on making India as global hub and including other IPRs in the existing regime would be desirable in this journey.
Statistically, the number of patent applications has been very low in India, when compared with other countries.As per the report released by the World Intellectual Property Organisation last year, India filed 1423 international patent applications, as against China with 29,846, Japan with 44,235 and Unites States with 57,385 application.Though the United States of America continues to maintain its numero-unoposition, there is marked shift of innovation footprint into Asia, especially China, Japan and the Republic of Korea.
There is clearly an opportunity for India to ride the bandwagon and project itself as a preferred IP destination. The beginning has been made and the challenge lies in maintaining the momentum in this exciting journey.