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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

 
Home Articles Taxation         Share :

Budget 2016Chapter C

Chapter C. New Tax Exemptions:

5. Taxation of Income from Patents:[S. 115BBF]
 

5.1 For encouraging Research and Development in India, the finance minister has proposed to levy a low rate of tax on royalty from Indian patents. It is proposed to levy a low tax @ 10 % on the royalty income earned from patents developed in India.
 

For claiming this benefit, following conditions need to be satisfied:
 

i) The person should be an Indian resident.

ii) The person who developed the patent should be the true and first inventor of the invention.

iii) At least 75% of the expenditure should be incurred by the eligible person.

iii) The patents need to be developed and registered in India.

iv) No expenditure or allowance can be claimed against this income.

 

5.2 Indian companies are liable to Minimum Alternative Tax (MAT) which is 18.5% of Book profits. The income falling under this new provision will not be considered while calculating Minimum Alternative Tax (MAT). Thus tax will be restricted to 10%.
 

5.3 For availing the benefit of lower tax rate, the person should exercise this option before the due date of filing the return. If the option of lower tax rate is exercised for any year, and in any of the five subsequent years he does not offer income as per this provision, he will not be entitled to take benefit of this provision for next 5 years.
 

5.4 Patent Box regime – how is Indian tax system different:
 

Some people have been referring to this provision of low tax rate for patents as “Patent Box Regime”. What is patent box is explained below.
 

Countries have been providing lower tax rate in case of royalty incomes. It started with Ireland providing tax relief to people who earn income out of patents. The patents were developed elsewhere. The expenditure was incurred elsewhere. However the patents were registered in Ireland and income was taxed a lower rate. Several other countries offer Patent Box regimes with variations.
 

These were known as “Patent Box Regimes”. The metaphor is that it is like a box where you drop (register) the patent. Once it is registered, low tax will apply. UK also started providing such relief in 2013. There were protests from other countries. OECD in its BEPS reports has said these patent box regimes should have “nexus-based” approach. The patents should be registered only if expenditure has been incurred in those countries and the patent holder has itself undertaken he activities. In essence, relief can be given by a Government only if development takes place in that country.
 

The Indian patent tax rate goes in line with the OECD suggestions. It provides relief to only the first and true developer of patent. Thus one cannot buy patent from someone else, register in India and earn income at a lower rate. This provision is intended only for encouragement of development and registration of patents in India by innovators.
 

5.5 Under the current law, section 80RRB provides a deduction up to Rs. 3,00,000 on income earned by way of royalty in respect of Patents registered in India. This small relief is for individuals. This provision also continues.
 

6. Start-ups - Tax incentives: [S. 80-IAC & S. 54GB]
 

6.1 To promote the Start-up India initiative of Prime Minister Narendra Modi, some tax incentives are proposed in the budget. These incentives are provided so as to facilitate a person who is in the initial stage of setting up its business. The incentives include tax relief for start-up business, and capital gains tax relief for persons investing in a start-up business.
 

The relief for start-up business is discussed below. Capital gain relief is discussed in para 6.2.
 

The details of Government’s plan for Start-ups are available on the website of DIPP at the following websites:
 

http://dipp.nic.in/English/Investor/startupindia.aspx. http://startupindia.gov.in/
 

6.2 Tax incentive for Start-up business: [S. 80-IAC]
 

The finance bill proposes a deduction of 100 % profits of a start-up for a consecutive period of 3 years out of 5 years starting from the year in which the startup is incorporated.
 

The incentive is available to a company as well as Limited Liability Partnership (LLP). To avail the said benefit, following conditions need to be satisfied:
 

i) The company or LLP needs to be incorporated between 1st April, 2016 and 1st April, 2019.

ii) The annual turnover should not exceed Rs. 25 Crore during any of the financial years - 2016-17 to 2020-21.

iii) The company or LLP should be in the eligible business which involves “innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property”.

iv) The company or LLP should have a certificate of eligible business from the Inter-Ministerial Board of Certification.
 

6.3 Relief for business:
 

The relief is available for “eligible business”. Thus a company or LLP may have other businesses. If it commences a start-up business, relief will be available for the start-up business if the specified conditions are fulfilled.
 

The business will need to have its accounts audited.
 

6.4 Period of relief:
 

Many start-ups make profits only after a few years. The Government has provided relief for 3 consecutive years out of first 5 years. The company or LLP can choose this 3 year period. Thus if it makes losses for first 2 years, it can choose to take this relief for the 3rd to the 5th year.
 

What will happen to the losses of the first 2 years? These will be carried forward for upto 8 years and set off against the profit of those years. Thus the first year loss can be set off against profits of 6th to 9th year.
 

What if the company or LLP has a loss during the period of 3 years? For example, it has a profit for 3rd and 5th year but a loss for 4th year. In this case, the loss of the 4th year can be carried forward. If it gets set off against the profit of 5th year, then there will be no relief for the profit of 5th year. If the loss cannot be fully set off against the profit for 5th year, it can be carried forward to subsequent years (upto 8 years).
 

In this manner, the start-up can claim relief for profits; and at the same time carry-forward its losses in other years.
 

6.5 Transactions with other businesses or related parties:
 

If there are any transactions with other business divisions (“other businesses”), or with other related parties, the transactions should be at market prices. This is to prevent people from claiming a higher relief than what should be available. An illustration is given below.
 

Illustration:
 

A software company develops a new app which helps people to monitor their health periodically and in a simple manner. This new app (health app) is approved by the Inter-Ministerial Board of Certification.
 

The health app business can sell subscription for its app to other divisions of the company, or to related companies. If it sells the subscription at a price which is higher than the market price, it can show a higher profit - on which it will not pay any tax. The other divisions / related companies will show lower profits as they will be claiming higher expenditure. To prevent such abuse, the provisions state that relief to health-app business will be available only to the extent of sale price being considered at market prices. Such anti-abuse measures are present in all provisions which provide for profit-based relief.
 

6.6 Normally for transactions with other businesses or related parties, transfer pricing rules apply. Thus audit, documentation, etc., apply. For start-up business, there is no requirement for transfer pricing audits, etc. It is a relief as application of detailed transfer pricing provisions can be an expensive exercise for start-ups.
 

It however should be borne in mind that the start-up will have to satisfy to the Income-tax officer that transactions with inter-company divisions or related parties are at market prices. Only detailed rules for audits, documents, etc. will not be applicable.
 

(It may be noted that there is no specific provision for providing relief. S. 92BA of the Income-tax Act provides that assessees claiming relief for businesses like infrastructure, etc. are required comply with Transfer Pricing rules. In section 92BA, start-ups businesses are not covered. Thus Transfer Pricing rules do not apply to start-ups.)
 

6.7 There are appropriate provisions to provide relief only to new businesses. Reorganisation of old businesses as new businesses will not be eligible.
 

6.8 While this is a welcome initiative and in line with the Government’s focus on start-ups, there seem to be quite a few conditions to be met for a start-up to obtain the certificate to claim this relief. Implementation will be key to success of this provision.
 

7. Incentive for employment generation: [S. 80JJA]
 

7.1 To provide a tax incentive to employers, higher deduction of expenses is provided for salary payments to new employees. This incentive had many conditions and was not successful in increasing employment. The provision is now proposed to be revised as under.
 

7.2 Deduction available:
 

A deduction of 30% of salary cost of new employees will be available to the employer. This is over and above the deduction for regular salary expenditure.
 

At present the additional deduction is available if the number of employees in the current year are 10 % more than the previous year. This condition has now been relaxed. There has to be an increase in the number of employees compared to the number of employees at the previous year-end.
 

7.3 Employees covered:
 

The relief is available only towards salary payments for those employees:
 

whose salary does not exceed Rs. 25,000 per month;
to whom salary is paid by bank or electronic transfer; and
who participates in the recognized provident fund.
 

There are a few other conditions also which have to be complied with.
 

7.4 Eligible persons / businesses:
 

At present the relief is available only to companies engaged in manufacturing of goods in a factory. Keeping in mind the need to increase the employment in the country, the government has now increased the scope of additional deduction to almost all businesses.
 

Under the new proposal, the additional deduction will be applicable to all sectors of employers who are liable for tax audit. The employer can be a corporate as well as a non-corporate entity; can be a resident or a non-resident.
 

Thus for example, employers with a turnover of upto Rs. 2 cr. who earn profit of less than 8% of their turnover are covered under tax audit. These employers can also claim this benefit. (see para 19 for presumptive taxation.)
 

7.5 The minimum number of days that the employee needs to be employed for has been proposed to be reduced from 300 to 240 days.
 

There are appropriate provisions to see that relief is not available to business formed by reorganisation of old business. For example: One can close an old business and start the same business in a new entity. All employees in the old business will be employed by the new entity. Such employers may claim that they have engaged new employees. This kind of planning is not permitted.
 

8. Deduction in respect of profits and gains from housing projects: [S. 80-IBA]
 

8.1 The Government of India has launched ‘Housing for All by 2022’ mission in the year 2015 that guarantees to provide affordable housing for all by 2022.
 

With a view to incentivise affordable housing, a new section has been proposed to provide a deduction of 100% of the profits and gains derived from business of developing and building housing projects.
 

8.2 The incentive is for small homes and small projects. The homes should not exceed 30 sq. meters built-up area (approx. 300 sq. feet) in Mumbai, Delhi, Kolkata, Chennai or within 25 kms measured aerially from the municipal limits of these cities. In other cities, it can be up to 60 sq. meters (approx. 600 sq. feet).
 

The project itself should be on a land area of 1,000 sq. meters or more in Mumbai, Delhi, Kolkata, Chennai or within 25 kms measured aerially from the municipal limits of these cities. In other cities, the land area should be of 2,000 sq. meters or more.
 

The project is the only housing project on the land referred to above.
 

8.3 The project should be approved by the relevant authorities between 1st June 2016 and 31st March 2019. The project should be completed within 3 years from the date of approval. If the project is not completed within 3 years, the relief claimed in the previous years will be considered as income in the year in which the due date of completion falls.
 

8.4 Appropriate checks have been kept to avoid misuse the provisions. For example, where a home is sold to an individual in a project, his spouse and minor children cannot be allotted another home in the same project.
 

In the past builders have combined smaller flats into one large flat and sold the same to HNIs. This time the definition has provided for the meaning of “residential unit”. It has been defined as – “an independent housing unit with separate facilities for living, cooking and sanitary requirements, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household”.
 

Thus it may be difficult to combine 2 or more units as one, and then sell it to people.
 

Still can there be any planning? Well time will say.
 

There are apprehensions that this relief will not reduce prices of houses for people with lower income.