Income Tax benefits of Research & Development in India

Research and Development (R&D) commenced its roots in India pre-independence and since then India has emerged as the choice location for R&D projects for global companies across industries.

Research and Development (R&D) commenced its roots in India pre-independence and since then India has emerged as the choice location for R&D projects for global companies across industries. This is because the Government of India has provided various incentive including Income tax benefits for companies in India including global corporations setting up their captive technology centers in India.
 
However, it has been observed that most of the companies incurring expenditure in research and development do not take the tax benefits provided by law due to ignorance or lack of clarity on relevant provisions.
 
The intention of the article is to abreast the readers with the current tax benefits under Income tax laws in India on expenditure incurred for scientific research and development considering the current pandemic situation where varied companies are indulged in R&D for same.
 
Tax benefit on expenditure on Scientific Research – Section 35 of the Income Tax Act, 1961
 
Table below summaries the nature of expenditure and subsequent tax benefit under Income tax law in India. 
 
Expenditure on Scientific Research Tax Benefit as amount of deduction allowed for tax computation
In-house revenue expenditure Revenue expenditure for scientific research inside the premises of the entity or for development of scientific facility for development of its own business. Thus, said expenditure must be done for development of own business/ relates to own business. 100% expenditure allowed as deduction
In-house Capital Expenditure Capital Expenditure incurred its own scientific research.
[Note:- If the assets acquired is sold without having been used for other purposes, surplus/ over deduction will be subject to Capital Gain Tax]
100% expenditure allowed as deduction [Note:- Capital expenditure for purchase of land is not allowed]
In-house revenue & Capital expenditure pre commencement of business Revenue and capital expenses within three years immediately before commencement of business on scientific research related to the business 100% expenditure allowed as deduction in the previous year in which the business is commenced.
Expenditure incurred on Approved Scientific Research Company Any sum paid by taxpayer namely individual, HUF, firm, company or any other person to an Indian entity to be used by such entity for approved scientific research (whether related or unrelated to the business of taxpayer)
[Note:- The main object of payee company must be scientific research and development]
100% expenditure allowed as deduction (AY 2018-19 onwards)
Contribution to Universities/ Organizations registered in India
Expenditure as contribution to approved Scientific Research Association (whether such scientific research related or unrelated to the business of the entity)
Expenditure as contribution to an approved university, college or other institutions for the use of scientific research (whether related or unrelated to the business of the entity)
Expenditure as contribution to an approved university, college or other institutions for the use of research in Social Sciences or Statistical Research (whether related to unrelated to the business of the entity)
100% expenditure allowed as deduction (AY 2021-22 onwards)

150% expenditure allowed as deduction (AY 2018-19 to 2020-21)
100% expenditure allowed as deduction (AY 2021-22 onwards)

150% expenditure allowed as deduction (AY 2018-19 to 2020-21)
100% expenditure allowed as deduction (AY 2018-19 onwards)
Contribution to National Laboratory Expenditure incurred as payments made to National laboratory, University, Indian Institute of Technology (IIT), specified person approved by specified authority. 100% expenditure allowed as deduction (AY 2021-22 onwards)

150% expenditure allowed as deduction (AY 2018-19 to 2020-21)
Expenses on Inhouse scientific R&D Revenue or capital expenditure on inhouse R&D incurred by company engaged in the business of bio-technology or in the business of manufacture or production of any article or thing (except those specified in the Eleventh Schedule).
[NOTE:- The expenditure on scientific research in relation to drugs and pharmaceuticals includes expenditure incurred on clinical drug trial, regulatory approval and filing an application for a patent]
100% expenditure allowed as deduction (AY 2021-22 onwards)

150% expenditure allowed as deduction (AY 2018-19 to 2020-21)

 
In view of above, the Government of India has provided tax benefits under income tax law on expenditure incurred inhouse or contribution to third party in this respect subject to conditions. Thus, Indian entities and foreign companies incurring above scientific research expenditure in India can claim tax benefits under income tax laws. However, the foreign entities incurring said expense can claim deduction in their entities registered in India.
 
It will not be out of context to mention here that the entities, universities, organizations, agencies, etc. engaged in scientific research & development are required to obtain approval from prescribed authority in relevant application forms in order to claim deduction of expenditure on scientific research under Income Tax law in India.
 
Relevant approvals/ forms
 
Below is the gist of relevant application forms required by entities, universities, organizations, agencies, laboratories etc. engaged in scientific research & development: -
 
  1. Form No. 3CF-I –Application form for approval under point 4 mentioned above in case of Scientific Research Association.
  2. Form No. 3CF-II - Application form for approval under point 4 mentioned above in case of University, college or other institution.
  3. Form No. 3CFIII - Application form for approval under point 3 mentioned above in case of company registered in India with main object as scientific R&D.
  4.  Form No. 3CG - Application form for approval of scientific research program as under point 5 mentioned above in case of National laboratory, University, Indian Institute of Technology (IIT), specified person approved by specified authority. The order for approval is given in Form No. 3CH.
  5. Form No. 3CK - Application form for entering into an agreement with the Department of Scientific and Industrial Research for co-operation in-house Research and Development facility and for audit of the accounts maintained for that facility in respect of point 6 above. The Order of approval of in-house research and development facility is given in Form No. 3CM.
 
Conclusion

It is constantly advised to taxpayers including Indian entities and foreign entities to abreast of relevant provisions under income tax law in India to claim the benefit of tax deduction on expenditure on scientific research and development. The Foreign entities planning to invest in R&D in India must also be acquaint of tax benefits and relevant compliances.