Can the Finance Bill 2017-18 implement the intent of National Intellectual Property Rights Policy?

By Reapan Tikoo, CEO, Powai Labs
It is for the first time that India is showing commitment to an IP ecosystem in the country. NIPRP was released by Department of Industrial Policy & Promotion in May’2016; the Policy is high on intent. The challenge before the coming Finance Bill is to implement this intent. India has to produce world class commercial and strategic IP, in absence of which India is just a market and a cheap labor destination; and dependents on foreign technology even for its strategic sector. Remember how GPS was denied to India during Kargil war or embargo after nuclear tests that denied critical technology to our strategic sector.

The NIPRP states, “Promote R&D through tax benefits available under various laws, through simplification of procedures for availing direct and indirect tax benefits.”

The following fit into this mandate:

1) Reimplementation of Section 80-IB (8A) of the Income  Tax Act, 1961 with Minimum Alternate Tax (MAT) waiver

Only Corporations having less than 100 crore global turnover should be eligible; so that big corporations don’t start a R&D subsidiary to avail this benefit. Misuse hurts the genuine party the most. This is meant for only research aka IP selling companies, who are non manufacturing and non service companies. When Section 80-IB (8A) was introduced  in 2002, the main shortcoming with the said provision  was Minimum Alternate Tax (MAT)  being still applicable; which defeated the purpose of the said provision. The Department of Science and Industrial Research, Government of India (DSIR) in November’2014 wrote to the Finance Ministry to reintroduce 80-IB (8A) along with exemption of MAT.

Delay in implementing this recommendation is an opportunity loss for our Country.80-IB (8A) scheme was withdrawn in 2007, though some companies will continue to avail the benefits till 2017.This provision has been incorrectly viewed  by many as a profit-linked deduction instead of an investment in our country’s high technology IP ecosystem. Actually the government has earned more as tax than it has given away in incentives through the implementation of this provision.For the Rs 187 crore in deductions availed by just 14 companies in 2013-14, India has delivered industrial research valued at nearly Rs 2,000 crore. This has translated into much more tax in excise, Income Tax from manufacturers, VAT/CST at State level, since IP is used by manufacturers to make products for the end user. It gives impetus to Make in India. It works out to around Rs. 50,000 Crore of taxes collected by Government i.e. 267X of Rs. 187 crore deduction availed.

Building a sustainable company based on IP is one of the most difficult businesses in the world. Chances of failure are high; the first field trials of product can fail and iterative incorporation of improvement till it succeeds can be time- and fund-consuming; this needs policy support from the government if India has to succeed.

2) Lowest  GST slab of 0% for selling the indigenous IP

This will make indigenous IP licensing more cost effective. DSIR Certificate for 80-IB(8A) companies should be the qualifier for the lowest GST rate for companies licensing its IP

3) The Finance Bill 2016-17 i.e. Budget offered flat 10% as income tax on licensing any patented technology

The following will make it effective:

a) With the delay in granting the patent, the date of filing should be taken into consideration for this provision.

b) Since cost of maintaining the patented technology, travel, field trails, cost of Patenting, Technical Manpower to keep the patented technology updated and cost of delivering the patented technology to the buyer etc, it is recommended that 10% of the profits from patented technology should be taxable instead of  taxing the income. e.g. Revenue of 500 lakhs is generated by licensing the patented technology, expenditure incurred to deliver the license of the patented technology is 450 lakhs; 50 lakhs is the profit and Income Tax payable today is 15 lakhs and if patent licensing income of 10% is taken into account then the Income Tax payable is 50 lakhs, which is more than the regular Income Tax. 10% of profit will be 5 lakhs, which is three times less than what is to be paid today.

This meets the intended objective of this scheme.  Instead of taxing the Income, Profit should be taxed. And patent without expenditure will be a theoretical patent and not real working patented technology

4) Corporate Social Responsibility

Big Corporations should be allowed to fund R&D under CSR with the DSIR recognized only IP generating companies

5)  Defense Offsets

Defense suppliers have offset obligations and it should be mandatory to invest a % of offsets (25%) with  the existing DSIR recognized only IP generating Companies; the IP created will have global users, including the defense vendors having the said offset obligations. This will enable India to own and build global IP in strategic sector.

The above five are an investment in building a sustainable IP ecosystem in the country and implements the intent of the  NIPRP