India: Intellectual Property Tax Regime In India

Last Updated: 9 July 2019
Article by Vidushi Trehan

1.1 INTRODUCTION

The relevance of intellectual property as an asset has just surged in the last few decades and has become a strong foot for the economic development of the nations. Reasons like global competition, high innovation risks, short product cycle, need for rapid changes in technology, high investments in R&D, production and marketing & more signifies the need to have systems in place which boost up the creation of intellectual property assets. An undermined organizational structure which catalyses the research and development of intellectual property assets in a country is taxation. A good IP taxation regime and efficient royalty policies would persuade the authors and artist to come up with more original & artistic work and expand the number of technology or know-how transfers into India.

This article is a survey of existing tax regime for Intellectual property in India, discussing the treatment of intellectual property under The Income Tax Act and Goods and Service Tax (GST). Furthermore, evaluating the tax structure and exemptions for IP in respect of a start-up and SME's.

1.2 TAX STRUCTURE IN INDIA

The manufacturing of an IP includes various transactions1 which are taxed separately:

  • DEDUCTION : The capital used for research and development of an IP which is the pre-existing stage including the analysis cost, manufacturing cost, etc is treated as an expense which is to be deducted from the gross income for further calculation of income tax
  • INCOME: The income received as royalty by transfer of IP is treated and taxed under the Income Tax Act, 1961. To promote innovation in the country, royalty income is given tax incentives
  • GOODS AND SALES TAX: Tax on Sale/ Transfer/ Licensing/ Assignment of the intellectual property.

Once the IP is created, it can be commercialized either by integrating it into products and selling them or the right to use the IP can be transferred- temporarily or permanently and is subject to taxation under the Indian Taxation system of direct and indirect taxes.

A. GST

Taxation provisions for intellectual property assets under the Indian Goods and Services tax has been dealt in detail in an earlier published article by Khurana and Khurana. At (http://www.mondaq.com/india/x/615592/Licensing+Syndication/GST+Implication+On+Intellectual+Property)

B. Income Tax

  • ROYALTY: Royalties are taxable income and also a business expense. If you receive royalties from someone for use of your property, you must claim these payments as business income.
    Explanation 2 to Section 9(1)(vi)2 of Income Tax Act elaborates the definition of royalty. Income by way of royalty is taxable under the Income Tax Act except in respect of any right, property or information used or services utilized by a resident, outside India or for the purposes of making or earning any income from any source outside India
    Royalty income is taxable in respect of any right, property or information used or services utilized by a non- resident, in India or for the purposes of making or earning any income from any source in India.
    If such income is payable in pursuance of an agreement made before the 1st day of April 1976, and the agreement is approved by the Central Government, is not taxable.3
  • DEPRECIATION: Section 32(1)(ii)4 of the Act accounts for depreciation of the intellectual property as expenditure for the purpose of calculation of income tax.
  • EXPENDITURE: Section 35A of the Income Tax Act 1961 explained the expenditure on acquisition of patents and copyrights rights.
    • Depreciation over the acquired patents and copyrights shall be claimed over a period of time when the consideration is paid in lump sum.
    • In a scenario where the consideration if paid on periodical timeline, the depreciation can be claimed as expenditure fully incurred for the purpose of business.
      Provided any expenditure incurred after the 28th day of February 1966 but before 1st April 1998, on the acquisition of patent rights or copyrights for the purpose of business, deductions will be allowed for each of the previous years on an amount equal to the appropriate fraction of the amount spread over 14 years.
    • Deductions are not applicable to amalgamating companies in the case of amalgamations, if the amalgamating company sells or otherwise transfers the rights to the amalgamated company (being Indian company).
  • Section 35AB states that where the assesse has paid any lump sum consideration for acquiring any know-how for the use of his business, the expenditure for the same shall be deductable in six equal installments for six years:
    • one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and
    • the balance amount shall be deducted in equal installments for each of the five immediately succeeding previous years.
  • DEDUCTIONS: Section 80 GGA talks about certain other deductions for scientific research which are provided under the head "deduction in respect of certain donation for scientific research or rural development" – Any sum paid to for scientific research or to a university, college or institution to be used for scientific research. The research work for the development of a patent comes under the umbrella of scientific research.
  • Under present laws, expensed deductions and additional weighted deductions are permitted to all taxpayers for R&D expenditure.
    • Such weighted deduction is restricted to 150% of the expenditure from tax year 2017/18 to tax year 2019/20. Thereafter, deduction will be restricted to 100% of the expenditure.
  • Section 80-O5 provides and that no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and for subsequent years for income from patents.
  • Section 80 OQA states that a deduction of 25% shall be allowed from any income obtained by the author in exercise of his profession on account of any lump sum consideration for the assignment or grant of any of his interests in the copyright of any of his books or of royalty or copyright fees.
  • Exceptions to 80 OQA : No deduction in case of:
    • Dictionary,
    • Thesaurus
    • Encyclopedia,
    • Any book that has been added as textbook in the curriculum by any university for degree of graduate or post graduate course of the university, or
    • Book which is written in any language specified in the 8th schedule of the constitution or in any other language as the Central Government by notification in the official gazette specifies for the promotional need of the language.
  • Section 80QQB,6 highlights the deductions to be made in respect of royalty income of authors of certain books other than text-books
  • Section 88 RRB deals with the deductions on payment of royalties for patents. In some cases, the total income earned by an individual on a Patent can be divided into royalty and additional income classified not under royalty. In all cases, the income received as royalty alone is eligible for tax deduction, it states that when income is received as a royalty, the whole income or Rs. 3 lakhs (whichever is lesser) shall be deducted.
    When a compulsory license is being granted in respect of any patent, the terms and conditions of the license agreement shall decide the status of the income by way of royalty for the purpose of allowing deduction under this section which shall not exceed the amount of royalty
  • Deductions under Section 80 RRB can be claimed only upon satisfaction of a few basic criteria by the inventor:
    • The individual claiming a deduction should be an Indian resident.
    • Only patentees can claim this tax deduction. Individuals who do not hold the original patent are not eligible for tax benefits.
    • The patent under Section RRB in question should be registered under the Patent Act of 1970, either on or after April 1, 2003.
  • Patent Box Regime: Section 115BBF provides concessional rate of taxation at 10% on royalty income in respect of exploitation of patents granted under Patents Act, 1970 and is only applicable to Indian resident who is a patentee (eligible taxpayer). The total income of eligible taxpayer must include income by way of royalty in respect of patent developed and registered in India and at-least 75% of the expenditure is incurred in India by eligible taxpayer for invention No other expenditure is allowed under the tax provisions if concessional tax rate under Section 115BBF is availed.
    The eligible taxpayer has an option to avail the benefit of Section 115BBF is exercised in any year but he is required to continue to avail the benefit for next 5 years because in case option is not exercised in any of such 5 years, he shall not be eligible to take the benefit under the section for the next 5 years following such year in which option is not exercised.7
  • Treatment of Capital Expenditure and Revenue Expenditure: While talking about the tax liability, the difference between revenue and capital expenditure is a critical one. A revenue expense is deductable from a business' chargeable income, while capital expenditure is not.
  • The Hon'ble Supreme Court in case of Assam Bengal Cement Companies Ltd. v. CIT,8 observed that "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or revenue expenditure."9

1.3 START-UPS AND SME'S

While talking about Start-ups and Small & Medium Enterprises, there is always confusion in the minds of people in respect of difference between the two. What is a startup, and how is it different from an SME? Let's first see the difference between the two. Startup is basically an industry which has been in existence for a period not more than 7 years and has a turnover not exceeding 25 Crores whereas SME's are enterprises with an investment upto 1 Crore in Plant and Machinery. The main objective of a startup is to work in innovation and development of products and processes and thus, government has come up with special tax exemptions to promote such startups

TAX EXEMPTION FOR STARTUPS:

Startup-India, to flagship initiative facilitated by of the Indian Government, intended to catalyze startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. The two main points in the 19-point Action plan to be taken into consideration in respect of intellectual property envisaged for Startup India includes easier IPR facilitation and better tax benefits and easier compliance.

  • SECTION 80- IAC:10

Post getting recognition a Startup may apply for Tax exemption under section 80 IAC of the Income Tax Act. Section 80 IAC of Income Tax Act, 1961 provides for Income tax exemption to recognized startups for any 3 consecutive years out of a block of 7 years (10 years for startups from Bio-Technology Sector) from the date of its incorporation. Eligibility Criteria for applying to Income Tax exemption (80IAC): The entity should be a recognized Startup

  • Only Private limited or a Limited Liability Partnership is eligible
  • The Startup should have been incorporated after 1st April, 2016
  • SECTION 56-Income Tax Act (ANGEL TAX)

Post getting recognition a Startup may apply for Angel Tax Exemption. Eligibility Criteria for Tax Exemption under Section 56 of the Income Tax Act:

  • The entity should be a DPIIT recognized Startup
  • Aggregate amount of paid up share capital and share premium of the Startup after the proposed issue of share, if any, does not exceed INR 25 Crore.11
  • Other Benefits for Intellectual Property for Startups:
    • FAST-TRACKING OF STARTUP PATENT APPLICATIONS AND FACILITATION HEPLINE
    • FACILITATION COST: The Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.
    • REBATE ON FILING OF APPLICATION: Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies, helping them spare costs in the crucial formative years.12

GOVERNMENT SCHEME FOR MSME

"Support for International Patent Protection in E&IT (SIP-EIT)" is a scheme launched by the Department of Electronics and Information Technology to provide financial support to MSMEs and Technology Start-Up units for international patent filing. SIP-EIT Scheme captures the growth opportunities in the area of information technology and electronics. This scheme encourages indigenous innovation and also recognise the value and capabilities of global IP. The Reimbursement limit has been set to the maximum of Rs. 15 Lakhs per invention or 50% of the total charges incurred in filing and processing of a patent application, whichever is lesser.

This support scheme can be applied at any stage of international patent filing by the applicant. However, the reimbursement will only be applicable to expenditures incurred from the date of acceptance of a complete application by DeiTY subject to the approval of the competent authority.13

1.4 CONCLUSION

Start-ups and SME's both are governed by the general taxation provisions in respect of intellectual property under The Income Tax Act, 1961 and GST. Taking into consideration additional tax exemption benefits, the government has provided for better tax exemption schemes, patent protections and more flexible public procurements for the startups with the main objective of working towards innovation and development of products and processes. On the other hand, the SME's are granted with better financing facilities at lower interest rates over leveraged tax benefits.

Footnotes

[1] Phases of IPR Cycle:

  • Creation
  • Acquisition
  • Exploitation
  • Disposal

[2]"royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

[3] Section 9(1)(vi) of The Income Tax Act, 1961

[4] 32. (1) In respect of depreciation of—

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998

[5] Where an Indian Company receives any income from foreign state or foreign enterprise in consideration for using any patent, registered Trademark, invention, design etc and the income is received by way of convertible foreign exchange in India or having been received as convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India is brought into India, a deduction of 40% for an assessment year beginning on the 1st day of April, 2001, a deduction of 30% for an assessment year beginning on the 1st day of April, 2002, a deduction of 20% for an assessment year beginning on the 1st day of April, 2003 and 10% for an assessment year beginning on the 1st day of April 2004 should be allowed. But no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and for subsequent years.

[6] "any income derived by [the author] in the exercise of his profession on account of any lump sum consideration for the assignment or grant of any of his interests in the copyright of any book, or of royalties or copyright fees (whether receivable in lump sum or otherwise) in respect of such book, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to 25% thereof."

[7] Tax on Income from Patents – Patent Box Regime , https://cleartax.in/s/patent-tax-treatment#choose (accessed on 12th June'19)

[8] [1955] 27, ITR 34 SC.

[9] Himanshu Sharma, Taxing Provision Related To IP Right In India: A Brief Look, http://www.mondaq.com/india/x/623230/Income+Tax/SA+IPTechAugust+2017 (accessed on 12th June'19)

[10] 80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent of the profits and gains derived from such business for three consecutive assessment years.

[11] https://abcaus.in/wp-content/uploads/2019/02/startup.pdf

[12] Startup India Scheme

[13] SIP-EIT Scheme, https://www.indiafilings.com/learn/sip-eit-scheme/

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