R and D activity to get hit as WD benefit to cease from FY21

New Delhi, Feb 19

ndia Inc's R and D activity might get adversely impacted as weighted deduction (WD) benefits, including those on capital expenses, stand withdrawn from the next fiscal.

Till now, the Income Tax Act allowed for weighted deduction for all Riamp;D activities.

However, four years back a sunset provision was introduced in the Budget on the availability of weighted deduction from April 1, 2020.

This deadline was expected to have been extended in this year's Budget. However, that did not happen.

"The weighted deduction was a key reason for entities to invest in Riamp;D infra. This withdrawal will impact future investments in this area," said Amarjeet Singh, Senior Partner, International Tax and Regulatory, KPMG in India.

According to experts, Riamp;D activity is a key proponent of the 'Make in India' strategy and to further expand the manufacturing sector in the country.

Besides, Riamp;D investments into India have grown with many MNCs establishing their research bases here.

"The 'Make in India' programme has got the booster of a reduced tax rate. Similarly, had the government continued with the weighted deduction for Riamp;D, it would have surely ensured that India marched ahead both in manufacturing and in the corresponding Riamp;D," said Gukul Chaudhri, Partner, Deloitte India.

"So, while India may not lose its tag as the Riamp;D lab of the world, the availability of weighted deduction would have ensured that India continued as one of the most attractive destinations for Riamp;D in the world," Chaudhri added.

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 Riamp;D activity as it generates new 'intellectual property' (IP), which in turn creates sustainable revenues. Such IP or new product gives rise to a new industry and other supporting activities," said Samir Kanabar, Partner, Tax and Regulatory Services, Ernst iamp; Young.

"In India, several sectors like auto, pharma etc. have invested substantially in Riamp;D facilities to develop new IPs, patents and hence, a new tax regime to boost Riamp;D was a major expectation," Kanabar added.

However, Suman Chowdhury, President, Ratings, Acuite Ratings and Research, said that the reduction in weighted tax deduction will not have any significant effect on India Inc's Riamp;D activity.

"India's Riamp;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 the manufacturing sector. Service oriented enterprises, whose business model thrives on innovation, do not require incentives to do Riamp;D in our opinion," Chowdhury added.

(Rohit Vaid can be contacted at rohit.v@ians.in)