The whole country was delighted to receive the news of the Goods and Services Tax (GST) Bill getting passed in the Rajya Sabha recently. One aspect that the reams of paper and hours of discussion around the GST regime seem to have ignored is the area of Intellectual Property.
GST should help foster the minuscule IP ecosystem in the country. India has to produce world- class commercial and strategic IP. In the absence of such IP, India becomes just a market and a cheap-labour destination. India is dependent on foreign technology for excellence in sectors that are strategic, including in defence, security, space programme, atomic energy and the like.
Remember the embargo after our nuclear tests that denied critical technology to our strategic sectors.
GST vs VAT
Any business entity adding value to a product pays value added tax (VAT). Today, companies license the IP to a manufacturer or developer. Assume the revenue from licensing is about Rs. 150 lakh. In a state such as Maharashtra, VAT is 5 per cent which amounts to 7.5 lakh. Since no product is manufactured, no excise is applicable. No service tax is applicable either since no service is offered. In the GST regime, the licence cost of indigenous IP will increase and at 20 per cent GST, it would be Rs.30 lakh. In effect, GST will shut down indigenous IP companies.
The National Intellectual Property Rights Policy (NIPRP) was released in May 2016 by the Department of Industrial Policy & Promotion. The objective in the Department’s own words is to “Promote R&D through tax benefits available under various laws, through simplification of procedures for availing direct and indirect tax benefits.”
With April 2017 being the target date for the roll out of GST across the country, it is important that provisions are made for IP-generating entities.
The following can fit into this mandate:
•Exemption of GST on both purchase of tools or computers as well as on sale of IP by indigenous entities.
•Equipment or license purchased by a company recognised by the Department of Science and Industrial Research (DSIR) as a research company as per the Income Tax Act Section 80-IB (8A) and which are designed for use, and are used exclusively in research, education, instruction or investigation, and repair to be exempted from GST.
The section of the I-T Act referred above allowed a 10-year tax break to non-service and companies that sell pure Intellectual Property.
The latest Budget offered a welcome flat 10 per cent as income tax on licensing any patented technology. A delay in granting the patent allows for the date of filing to be taken into consideration for this provision. This should be persisted with.
Reintroduction of the above-mentioned section along with a waiver of the Minimum Alternate Tax (MAT) fits in the said articulation.
When the section was introduced in 2002, MAT was still applicable, which defeated the purpose of the provision. Based on the feedback from the R&D community, both the Secretary DSIR as well as the Niti Aayog have recommended an exemption from MAT for these entities.
The section was withdrawn in 2007, though some companies will continue to enjoy the benefits till 2017. This provision has been considered by many as a profit-linked deduction. Such a view is incorrect.Building a sustainable organisation based on IP is tough. Chances of failure are high; the first field trials of a product can fail and iterative improvement till it succeeds can be time-consuming. This needs government support.
Most countries that have GST have retained full exemption for IP-generating entities as in the case of Malaysia or have kept GST very low e.g. 6% in certain cases.