New Delhi, Feb 19 (IANS): India Inc's R&D activity might get adversely impacted as weighted deduction benefit including those on capital expenses stands withdrawn from the next fiscal.
Till now, the Income Tax Act allowed for weighted deduction for all R&D activities.
However, four years back, a sunset provision was introduced in the Budget on the availability of the weighted deduction till April 1, 2020. This deadline was expected to have been extended in this year's Budget, but that did not happen.
"The weighted deduction was a key reason for entities to invest in R&D infra," said Amarjeet Singh, Senior Partner, International Tax and Regulatory, KPMG in India.
"This withdrawal will impact future investment in this area."
According to experts, R&D activity is a key proponent of the Make in India strategy and to further expand the manufacturing sector in the country.
Besides, R&D investments into India have grown with many MNCs establishing their research bases here.
"While the 'Make in India' programme has got the booster of a reduced tax rate, in a similar manner, if the government would have continued with the weighted deduction for R&D, this would have surely ensured that India marches ahead both in manufacturing and also the corresponding R&D in India," Gukul Chaudhri, Partner, Deloitte India, said.
"So, while India may not lose its tag as the R&D lab of the world, but the availability of weighted deduction would have ensured that India continues as one of the most attractive destinations for R&D in the world."
The Finance Act, 2016 restricted the availability of expenditure incurred on scientific research to 150 per cent from April 1, 2017 and no weighted deduction from April 1, 2020.
"Globally, most countries are encouraging R&D activity as it generates new 'Intellectual Property', which in turn creates sustainable revenues. Such IP or new product gives rise to a new industry as all other supporting activities," said Samir Kanabar, Partner - Tax and Regulatory Services, Ernst & Young.
"In India, several sectors like auto, pharma etc have invested substantially in R&D facilities to develop new IPs, patents and hence, a new tax regime to boost R&D was a major expectation."
However, Suman Chowdhury, President-Ratings at Acuite Ratings and Research said that the reduction in weighted tax deduction will not have any significant effect on India Inc's R&D activity.
"India's R&D activity has held steady at 0.7 per cent of GDP over 5 years and no visible signs of positive outcomes were seen emanating from private enterprises despite such benefits," Chowdhury said.
"Nevertheless, corporates now enjoy a reduced effective corporate tax structure, which should more than compensate for the loss at least for manufacturing sector. Service oriented enterprises, whose business model thrives on innovation, do not require incentives to do R&D in our opinion."