Chirag Wadhwa

Chirag WadhwaPress Release dated 20th November provided a framework for phasing out of deductions and exemptions as was announced by the Hon’ble Finance Minister in his budget speech. Vide the said press release it has been provided that:

  • Profit linked, area linked and investment linked deductions will be phased out.
  • Sunset date of 31st March 2017 is provided for commencement of activities for availing tax incentives with no terminal date.
  • No weighted deduction with effect from 1st April 2017.

The above phase out of deductions and exemptions is compensated by reduction in corporate tax rates from 30% to 25% over the next four years. This step is aimed at curbing litigation, simplification of tax laws thereby brining clarity, transparency, certainty and in turn paving the path for a non adversarial tax system.

The approach of the government appears to be right, however a question that arises is that whether the Finance Ministry jumped the gun!!.

This is particularly relevant with respect to Weighted Deduction or Super Deduction for Research and Development being withdrawn.

A super deduction of 125% to 200% is permitted for specified payments made to prescribed entities carrying out research and development in India. The same is provided for mobilization of funds for organizations conducting research and development and thereby also fulfilling the rapacity of the taxpayers for deductions.

A 200% super deduction is available for in-house Research & Development expenditure, including capital expenditure (excluding land & building).The same is limited to taxpayers in the business of bio-technology or manufacturing or producing of products(Other than products in the negative list).

It is proposed to phase out the super deduction available for such research and development contributions/expenses, thereby providing only for the accelerated deduction of 100% in the year of expenditure.

Research & Development spends are an indicator of competitiveness of a country’s economy. The pace of technological progress is directly proportional to the efforts on Research and Development. The expenditure levels on Research & Development therefore acts as reliable barometer of innovative capacity.

This phasing out of exemption clearly seems an attempt of playing darts in the dark !!

I.  Till date there is no assurance of the reduced rate would be an all- in rate of 25% or there would be an additional levy of cess & surcharge on 25% thereby causing the rates to rise. Assuming that the rate is an all-in rate of 25%, still the rates would be only marginally competitive. For eg. The rate of Corporate Tax is China is 25%, in Singapore its 17%, in UK its 20%.

II. The second aspect is about Research and Development Credit and Patent Box Regime. For encouraging Research and developments, countries offer various tax incentives which are of 3 types: Research and Development Tax Credit/Research and Experimentation tax Credit (as is known in US), Super Deduction and Patent Box or Innovation Box. Countries such as UK, Netherlands provide all the three incentives to promote research and development. India on the other hand, which promoted research and development by providing super deduction, is phasing out the same. Although it is quite palpable that research and developments are not solely undertaken because of the availability of tax incentives, however research and development needs to be incentivized.

On a consideration it can be seen that countries having lower rate of corporate tax in comparison with India are providing incentives to research & development, and India on the other hand is reducing the limited benefits available.

III. It is noteworthy to take into account that China, which incentivizes Research and Development by providing Super Deduction of 150% of the eligible expenditure incurred, has expanded the scope of its super deduction for qualified Research and Development expenses vide. Caishui(2015) No.119 [Circular 119 ].The circular is effective from 1st January 2016 and extends the Super Deduction to expenses such as expert consultation fees, travelling fees, meeting fees!!

No doubt such cost are capped at 10% of the total eligible Research and Development expenditure, but providing super deduction for travelling and meeting fees shows the intent and importance placed by the government on Research and Development. The circular further provides retrospective 3 years claim of the previous unclaimed Research and Development expenditure.

The above move by China, is in sharp contrast with the move taken by India. On one hand China is extending and expanding its scope of super deduction while on the other hand we have India which is phasing out the existing available super deduction.

India needs to provide a level playing field as other countries do provide various benefits for Research and Development, whereas in India the available benefits are being taken away, thereby negatively impacting the innovation in India.

A reference needs to be made of the Base Erosion and Profit Shifting Project conceptualized by the OECD & G20. There are 15 action plan addressing different specific issues, on which OECD has provided its recommendations to tackle the issues.

IV. Action 5 deals with Countering harmful tax practices more effectively, taking into account transparency and substance. Action plan 5 recommends a nexus approach for taxing profits arising from intellectual properties. The nexus approach prescribes that income arising from exploitation of IP should be attributed and taxed in the jurisdiction where substantial research & development (R&D) activities are undertaken rather than the jurisdiction of legal ownership only.

So in the days to come, the jurisdiction in which Research and Development takes place, would be the country which would be entitled to tax the profits earned from intellectual properties. So even if the ownership of intellectual properties are held by a company situated in Tax Heavens, the profits would be taxable in India if research and development are conducted in India. Thus the government should promote research and development in the country as it would in turn help taxing the exploitation of intellectual property rights, which would be a significant help as there would be more legitimate tax collection.

India being a G20 member has endorsed the BEPS Action plans, however having an observer status within OECD, would have a selective approach to adoption of the action plans.

India should rather focus on trying to become a Research & Development hub. The approach along with ‘Make in India’ should also be ‘Design in India’.

The same would only be possible when the government takes promising steps in this regards. It is hoped that government realizes that providing incentive to research and development would bring in better revenues and prosperity to India.

(Author can be reached at

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October 2020