Government delivers on R&D outsourcing tax promise

Written by Economy Bureau | New Delhi | Updated: Dec 30 2008, 05:53am hrs
Companies outsourcing their research and development activities will now be able to claim a weighted deduction of 125% on such expenditure at the time of filing their income tax returns. This follows a recent notification by the finance ministry, giving teeth to a proposal announced in the Budget this year.

According to the notification by the Central Board of Direct Taxes (CBDT), any company planning to claim the deduction will have to register with the income tax department.

Approval will be granted to the company only if the expenditure is incurred for scientific research and it maintains separate books of accounts for such contributions and expenses. The applicant company shall carry on scientific research through its own employees using its own assets, the CBDT has said. This could however turn contentious as tax experts are unsure whether hired premises and assets of a company will be covered under the scheme.

The company will have to provide information on patents or similar rights and a programme of research projects to be undertaken during the year to the tax department for perusal. It shall also have to submit a detailed note on the research work undertaken by it in the previous year along with published researched articles in national and international journals during the year.

Significantly, companies will be required to give information on research projects completed by it during the last three years while applying for the weighted deduction.

Tax experts say that the move will promote all scientific research undertaken by India Inc, it is the pharmaceutical companies that will be the main beneficiaries. But such stringent criteria could turn into a bone of contention as many companies may not like to divulge sensitive information relating to their ongoing R&D activities.

It is also unclear whether start-ups will be able to get the tax benefit as they will not have any prior research

experience, Hitesh Sharma, partner Ernst and Young pointed out .