Benefits related to Research & Development expenses under Income Tax Act

KARNITI Part 68

Benefits related to Research & Development expenses under Income Tax Act.

Arjuna (Fictional Character): Krishna, ISRO succeeded in Mars mission by launching the largest rocket GSLV Mark III in space after lot of efforts and spending crores of rupees on research and development. Similarly if businessmen carry out such R&D, etc. activity, then is there any provision of Income Tax which benefits him?

Krishna (Fictional Character): Arjuna, hats off to the Indian scientists. Today due to all the research activities, the world has developed. Therefore government also encourages research in business. Industrialists give more emphasis on research and thereby invent and manufacture new goods. In many industries like pharmaceutical, automobile, engineering, electrical, etc. new research projects are always being initiated. In this a lot of money is expended or invested. If research project succeeds then after selling product profit can be earned, otherwise loss has to be faced. Companies like Apple, TCS, Google, etc. are succeeding because of research. Under Income tax act, additional deduction for such expenses is given.

Two types of expenses such as Scientific Research and Research and Development are covered. Additional deduction is also available as per conditions mentioned there in.

Arjuna: Krishna, How and on which research expenses can a taxpayer take benefit?

Krishna: Arjuna, the Income Tax Act gives benefit in two ways

1) Expenditure incurred for carrying research in own business. In this for Scientific Research deduction of 100% of expenditure and for Research and Development deduction of 200% of expenditure is given

2) If contribution is made to other specified institutions or companies for incurring research then deduction of 125%, 175% and 200% can be availed. Please understand carefully, these deductions are available on approved expenditure if incurred and to approved organizations if contributed. All businessmen can take the benefit of this. But due to unawareness many do not take benefit of this.

Arjuna: Krishna, in first type, how can the businessman take the benefit of 100% deduction?

Krishna: Arjuna, 100% deduction is available on the expenses incurred on specified scientific research. As per section 35 (1) of Income Tax Act deduction is available for revenue expenditure. However as per section 35 (2) of Income Tax Act deduction is available for capital expenditure also. The 100% deduction is available in the year in which capital expenditure is incurred. But depreciation is not allowed on this capital expenditure. Further if land is purchased then deduction is not available. For e.g. for scientific research if machine is purchased or for a laboratory an air conditioner is purchased then in that year 100% deduction of it can be availed. Further expenses incurred in earlier three years before starting business is also allowed for deduction. It means for starting new business theses provisions are beneficial.

Arjuna: Krishna, in second type, for research and development, how can the taxpayer take the benefit of 200% deduction?

Krishna: Arjuna, as per section 35 (2AB) of Income Tax Act manufacturing company only can take deduction under this section. This deduction is available to approved in-house research. In this 200% deduction is available on revenue as well as capital expenditure. However it cannot avail other deduction of section 35.

For e.g. if any company wants to undertake research for manufacturing products and the said project is approved and company incurred Rs. 10 Lakhs for capital expenditure and Rs. 8 Lakh revenue expenditure then the company can avail deduction of Rs. 36 Lakhs. This provision is very beneficial. Because in this deduction of twice amount of the expenditure is available and at the end lesser income tax will have to be paid. In this from of tax planning one can save tax and encouragement for developing, innovation, research is also initiated. Thus it’s useful for developing business also. For e.g. Indian companies like Reliance, Telco, Maruti, Wockhart benefit from this and continue the research work and save taxes by following the laws.

Arjuna: Krishna, in second type of deduction, if taxpayer makes contribution to other organization for scientific research then does he get deduction?

Krishna: Arjuna, deduction is available on the basis of contribution made to which organization and for what purpose. In this there are the following three types:

1. As per section 35 (1) (ii/iii) of the Income Tax Act if contribution is made to approved research organization or college or university for scientific research then 175% of deduction is available. Further this contribution may or may not be related to business. For e.g. if taxpayer has given Rs. 100,000/- to an approved research organization for scientific research then in that year the taxpayer can avail deduction of Rs. 175,000/-. Further if contribution is made for social or statistical research then deduction of 125% can be availed. 

2. As per section 35 (1) (iia) of the Income Tax Act if contribution is made to approved company for scientific research then deduction of 125% can be availed.

3. As per section 35 (1) (2AA) of the Income Tax Act if contribution is made to National Laboratory or IIT or University for specific scientific research then weighted deduction of 200% is available to the taxpayer.

For e.g. if taxpayer has made a contribution for scientific research to IIT of Rs. 100,000/- then it can avail deduction of Rs. 200,000/-. Any businessman can avail deduction under these provisions and they can have research related results in their business.

Arjuna: Krishna, What should one learn from the research and income tax provision?

Krishna: Arjuna, research is a continuous process. In India for encouraging research in industries there are various schemes. Western countries like America always encourage research, therefore business flourishes there and in this there is major contribution of Indian Scientists. If they get opportunity in India then Indian Industries will also flourish. New products are developed by research. In practical life, due to new products, festival shopping becomes more joyful. As in Christmas gifts are given. New thoughts, ideas, inventions, research are the need of life. Therefore it can be said that real wealth is hidden in research.

Dear CACLUBINDIA and Karniti lovers your views please.