The chemicals and fertilisers ministry has asked the finance ministry to extend the income tax concession for companies that are spending on research and development (R&D) for another 10 years beginning April 1.
The benefit allowed under section 35 (2AB) of the Income Tax Act, which lowers any manufacturer?s taxable income by twice the amount spent on research, is set to expire at the end of this financial year. Drug companies are the main beneficiaries of the scheme.
?This is the only investment-linked tax benefit allowed under the existing Income Tax Act and retaining it fits into the finance ministry?s plans in the proposed new direct tax code (DTC) to replace investment-linked tax breaks with profit-linked ones, said Lakshminarayanan, leader, Tax in India, Deloitte Touche Tohmatsu India.
The DTC, expected to come into force next fiscal, will phase out all ?inefficient and regressive? profit-linked incentives such as tax holidays from certain businesses and introduce investment-linked tax breaks that allow a company to recover most of the capital and revenue expenditure incurred and pay tax on profits thereafter.
Finance minister Pranab Mukherjee had enhanced the benefit under section 35 (2AB) in his 2011-12 Budget allowing companies to deduct twice the amount invested on R&D while calculating taxable income, up from one-and-a-half times.
Expenses on land and building are not allowed as deduction under this section, whereas DTC disallows cost of land, goodwill and financial instruments from the purview of investment-linked incentives. The benefit of deduction under 35 (2AB), originally given to pharmaceutical, biotechnology, electronic, telecom and chemical products as well as computers was expanded to all manufactured articles from April 2010.
Sources said North Block has also been urged by the chemicals and fertilisers ministry to change the norms regarding the minimum alternate tax (MAT) so that R&D-focused companies are able to take full benefit of this incentive. Now, if a company?s tax liability is below 18% due to tax breaks as against the corporate income tax rate of 30%, it still has to pay a minimum of 18% of book profits as tax. The proposal is to let companies claim the full deduction on R&D spend or to treat such expenses as investment tax credit, which could be set off against the tax or MAT liability, said a source. Change in rules are also proposed to allow cenvat credit on all inputs used in R&D even if they are used in a location away from the factory premises. The chemicals ministry also wants the cost of filing patent applications abroad to be classified as researchspend.
Pharmaceuticals, a knowledge based industry, has been a major beneficiary of the scheme. However, its total research spending accounts for less than 1% of the $130 billion spent globally on drug research. The government believes that this sector needs to double its R&D spend from the present 6-7% of total sales (about R3,500 crore) if it is to attain the goal of producing one in every ten new drugs invented. The world average of pharmaceutical research spending is 12-15% of total sales.
?Steps to encourage R&D needs priority. Canada, for example, allows research expenditure as a tax credit,? said Lakshminarayanan.