The government in India has created a concessional taxation regime for patent income to encourage local research and development (R&D) activities and to make India a global R&D hub.
The Central Board of Direct Taxes (CBDT) released a notification on 3 April 2017 on the patent box regime under section 115BBF of the Income-tax Act, 1961. The new rules provide additional incentive for companies to retain and develop innovative patented products, thus encouraging them to locate high-value R&D jobs in India.
Summary
Introduced in the Finance Act of 2016, Section 115BBF imposes a 10% tax on royalty income from patents developed and registered in India, with no allowance for expenditures for royalty income allowed.
- The new rules provide that the eligible assessee must electronically furnish form No.3CFA for exercising the option to tax royalty income under Section 115BBF of the Income-tax Act, 1961 from a patent developed and registered in India by the assessee. Form 3CFA must be complete in all respects and furnished by the due date specified in Section 139(1) of the Income-tax Act for furnishing the return for options exercised for that assessment year.
- The Director General of Income-tax (Systems) will specify the procedures, formats, and standards for the purposes of ensuring secure capture and transmission data and will also be responsible for evolving and implementing appropriate security, archival and retrieval policies for furnishing and verifying the form.
- In form 3CFA, the “eligible assessee” needs to provide general details as well as “eligible patent” details such as description of patent, date of grant of patent, and whether the patent was granted to single persons. Similarly, the eligible assessee needs to provide details of royalty income from eligible patent and details of expenditures incurred in India and outside India on an eligible patent.
KPMG observation
In addition to encouraging patent activity in India, the new regime is consistent with the Organisation for Economic Cooperation and Development’s base erosion and profit shifting project. Action 5 addresses the concern that income arising from intellectual property should be attributed to and taxed in the jurisdiction where substantial R&D activities are undertaken, and not just the jurisdiction of legal ownership.
Read an April 2017 report [PDF 262 KB] prepared by the KPMG member firm in India