For R&D startups and investors, a key consideration while deciding on the starting destination is the tax structures and incentives in the host country. India did offer an attractive incentive under Section 80-IB (8A) of the Income Tax Act till the year 2007, but this scheme was withdrawn, though some companies will continue to avail the benefits till 2017.

This provision has been considered by many as a profit-linked deduction instead of an investment in our country’s high technology startup ecosystem, which isn’t the correct way of viewing it. Actually the government has earned more as tax than it has given away in incentives through the implementation of this provision. Here are some ballpark figures that make the point.

For the Rs 187 crore in deductions availed by just 14 companies in 2013-14, India has delivered industrial research valued at nearly Rs 2,000 crore. This Rs 2,000 crore has been generated from non-manufacturing and non-service companies and from sales of pure research output. This money is accounted for by royalty or technology transfer fee, paid by the manufacturer to the industrial R&D entity . Going by the rule of thumb, a manufacturing value of 100X of the research royalty would have been generated, i.e. Rs 2 lakh crore. At 10% excise, this would have fetched the government Rs 2,000 crore in revenue. In addition, the manufacturing companies would have paid Income Tax at 30%, amounting to Rs 30,000 crore, assuming an operating margin of 50%. The state governments hosting the 14 companies would have earned VATCST at 5% amounting to Rs 100 crore. And, after the 10-year tax break, when these pure R&D startup companies become sustainable, we assume that they would have doubled their revenue. The income tax that these companies would have to pay then will amount to Rs 1,200 crore. Thus, total revenue earned by the central government on an investment of Rs 187 crore in the 2013-14 window is around Rs 50,000 crore and by state governments Rs 100 crore – a return on investment of 267 times.

An Indian Software Product Industry Round-table (iSPIRT) report states that as many as 75% of new technology ventures which plan to raise capital to startup this year will be domiciled outside In dia. India has slipped to 81st position in the Global Innovation Index 2015 report, a decline by five positions as compared to last year.

Building a sustainable startup in research is one of the most difficult businesses in the world. Chances of failure are high; the first field trials of product can fail and iterative incorporation of improvement till it succeeds can be time and fund-consuming; this needs policy support from the government if India has to succeed. India remains a market and destination for cheap labour in the absence of our own industrial research capability . None of our chronic problems will be solved by outsiders, more so in strategic sector. While the scheme is in its last lap, it continues to provide innovation impetus and generate revenue for the government. If we had a thousand such companies, from different domains, imagine what it could mean for India both from a problem-solving point of view as well as for revenue generation. It goes without saying that it would encourage Make in India. Since VATCST, excise etc. will converge into the Goods and Services Tax in time to come, I strongly recommend GST waiver for R&D startups.

I understand that the Department of Scientific and Industrial Research has recommended to the Ministry of Finance the reintroduction of Section 80-IB (8A) of the Income Tax Act with Minimum Alternate Tax (MAT) waiver. NITI Aayog also believes that there is merit in the recommendations. The recommendations focus around the following: Reintroduction of Section 80-IB (8A) of the I-T Act with MAT exemption as articulated by the DSIR in its November 2014 recommendation to Finance Ministry.

GST waiver for companies qualifying under Section 80-IB (8A) for cost advantage to buyers of indigenous research output.

Reintroducing Section 80-IB (8A) of Income Tax Act is an investment in building a sustainable industrial R&D-cum-startup ecosystem in the country.

Image Courtsey: thehindubusinessline