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Union Budget 2016 updates

New Delhi, 3 March 2016 (RDI): 1. Introduction 1.1 The Finance Minister (FM) seems to be cheering the Prime minister's 'Make in India' initiative, not only on the manufacturing of tangible products but also on some of the intangible assets such as 'Patents'.
1.2 In the Finance Bill, 2016, the FM has proposed a concessional tax rate of 10 percent (plus applicable surcharge and cess) for royalty earned from 'Patent' that is developed and registered in India. This has been done by way proposing to insert new Section 115BBF in the Income-tax Act, 1961 (hereinafter referred to as 'the Act').

2. Eligible Taxpayers and concessional tax regime

2.1 In order to be take advantage of the concessional tax rate under the proposed Section 115BBF, the taxpayer should satisfy the following cumulative conditions:

 ♦  The taxpayer should be a person resident in India (in accordance with Section 6 of the Act)

 ♦  The taxpayer earns income in the form of 'royalty' in respect of 'patent' that is developed and registered in India. In other words, the patent should be in respect invention which is granted under the Patent's Act, 1970 (hereinafter referred to 'Patent's Act')

 ♦  Such taxpayer must be the true and first inventor of the invention. The name of the taxpayer is entered on the patent register as a patentee, in accordance with the Patent's Act. Where more than one person is registered as patentee in respect of that patent, the proposed section would apply to the 'true and first inventor'.

2.2 On satisfaction of the above conditions, the income by way of 'royalty' shall be taxable in the hands of the taxpayer at a special concessional rate of 10 percent (plus applicable surcharge and cess).

2.3 The tax of 10 percent shall apply on the income by way of 'royalty' i.e. any consideration (whether lump-sum or periodic)for:

 ♦  transfer of all or any rights (including the granting of a license) in respect of a patent;

 ♦  imparting of any information concerning the working of, or the use of, a patent;

 ♦  use of any patent;

 ♦  rendering of any services in connection with the above three activities.

2.4 However, the following income shall not be considered as 'royalty' for the purpose of Section 115BBF of the Act and therefore shall not be eligible for concessional 10 percent rate (plus applicable surcharge and cess):

 ♦  any income chargeable under the head 'Capital Gains'

 ♦  any income from sale of products manufactured from commercial exploitation of patented process or patented article

 3. Conclusion

3.1 It has been a long-standing industry grievance that unlike most of the other countries, the Patents that are developed in India have not been given the deserved preferential tax treatment. The FM now seems to have resolved those and related grievances by providing concessional rate of tax for indigenously developed patents.

3.2 This move should surely give impetus to indigenous Research & Development ('R & D') activities. The biggest advantage is that the concessional treatment applies not only to the new patents that would be registered but also to the existing patents.

3.3 It was observed that most of the patents developed in India are completely sold out and not commercially exploited in India. This concessional tax treatment should now result in additional incentive for companies to retain and commercialize existing patents and to develop new innovative patented products. This would also indirectly encourage India to generate employment in high-value profile which is associated with the development, manufacture and exploitation of patents in India.

3.4 This proposal of taxing indigenously developed royalty in India is in line with the recommendation of The Organization for Economic Cooperation and Development (OECD)'s Base Erosion and Profit Shifting (BEPS) project - Action Plan 5. As per the said Action plan, the nexus approach which prescribes that income arising from exploitation of Intellectual property should be attributed and taxed in the jurisdiction where substantial R&D activities are undertaken as against the jurisdiction of legal ownership.

3.5 In proposed concessional treatment, the FM's focus seems to be on making India a global R&D hub. Though there could be conflicting views on whether India could become a global R&D hub, this first step of providing a concessional tax treatment coupled with other government initiatives on 'ease of doing business' should go a long way in that direction.

Article Credit: Rahul CA Rahul Srivastava
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