Effect of Union Budget, 2017 on the R&D/ Intellectual Property Practices in India

Union budget that was highly waited for (after demonetization) had gained more attention also due to preponing to February 01, 2017.

As a matter of fact, every year budget has a certain impact on various industries including the IP industry and R&D sectors. In this article, we will try to analyze the possible effects of the 2017 budget on R&D/Intellectual Property (IP) Practices in India. Though there were no special funds/incentives proposed for R&D, the budget did have certain announcements for indirect effect on the IP practices.

1. With intent made clear in budget 2015 itself, in 2017 Hon’ble Finance Minister Arun Jaitley proposed that corporate income tax for smaller companies with annual turnover up to INR 50 CR be reduced to 25%.

In 2016, FM had proposed that companies with turnover less than INR 5 CR would have to pay tax less by 1% and new manufacturing companies who do not avail of any exemption would be charged only 25%.

This move will make sure that medium size companies do not pay more tax as compared to larger companies as observed in 2015-2016, wherein 2.85 lakh companies making a profit of less than INR 1 CR had to pay an effective tax rate of 30.26% while 298 companies making a profit of more than 500 CR paid an effective tax rate of 25.90%.

This reduction in tax rate is likely to give smaller companies the flexibility to invest saved 5% in R&D activities.

1. FM also believes pushing digital transactions further would enable small and micro enterprises to access formal credit. He also made clear that the Small Industries Development Bank of India (SIDBI) will be encouraged by the government to refinance credit institutions that provide unsecured loans at reasonable interest rates to borrowers based on their transaction history. This is likely to give higher chances of eligibility to IP driven companies not having strong collateral.
2. Focus on startups in 2016 seems to be continued in 2017 as well. Among the schemes announced for start-ups, eligibility for start-ups for expedited examination of Patent Applications was a great move. In 2017, the government aims to heavily utilize technology for pushing initiatives such as SWAYAM (providing opportunities for life-long learning) and DIGIGAON (providing telemedicine, education, and skills through digital technology), start-ups would never want to miss an opportunity to contribute through innovative ideas for the facilitation of implementation of schemes.
3. In another move to encourage start-ups, in 2016 it was announced that 100% deduction would be available for any 3 consecutive assessment years out of 5 years beginning from the year in which the eligible start-up is incorporated with the condition that total turnover of an eligible start-up should not exceed Rs. 25 Crore in any of the previous years beginning on or after the 1st day of April 2016 and ending on the 31st day of March 2021. In the 2017 budget, a period of 5 years has been changed to 7 years.
4. Research and Development Cess Act, 1986 is proposed to be repealed. Reduction in tax cost to the extent of 5% (R&D cess) on technology imports. Subsequently, service tax at 15% to be paid in full.
5. On a disappointing note, there seems to be no separate incentive for R&D.

All in all, though there seem to be some encouraging proposals nothing substantial is coming to the way of the IP fraternity as was provided in last year’s budget in the light of the Make in India Regime. But this is not totally surprising as, on all fronts, the budget seems to be a cautious approach (understandable in light of other measures such as demonetization and GST being radical).