Tax on Income from Patents – Patent Box Regime

Tax on Income from Patents – Patent Box Regime

How does a patent box regime work in India? This article will give you all the answers A patent is a statutory right for an invention granted for a limited period of time to an individual (the person filing a patent application) by the Government in exchange for full disclosure of an invention in order to exclude others from making, using, selling, or importing the patented product, or process for producing that product, without consent.

Measures to evade tax are a global concern. An individual or a company may invest in tax saving schemes to avoid paying extra income tax to the respective nation’s government. More than individuals, large multinational companies and conglomerates have the advantage to structure business operations so that they can optimise taxes. In general, inventors get patents registered in tax havens even if they are developed in a different country for this very reason.

To retain intellectual property in the host nation, and to promote indigenous research and development, several countries have started introducing favourable treatment for income overexploitation of intellectual property.

To enable this, the Organisation for Economic Cooperation and Development (OECD) has recognised that preferential intellectual property regimes can be misused and have therefore recommended a nexus approach under Action Plan 5 that deals with harmful tax practices in its Base Erosion and  Profit Sharing (BEPS) project that involves 20 nations, including India. 

In this ‘nexus’ approach, income that arises from exploitation of intellectual property should be attributed and taxed in the jurisdiction where research and development activities are undertaken rather than taxing it only in the jurisdiction that has the legal ownership of intellectual property.

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Patent tax regimes all over the world

This is more common in European nations. Ireland was the first to introduce this patent tax regime and called it a Patent Box. Several other countries introduced this tax regime and gave it unique names. Some of these nations include France (Patent and Royalties), United Kingdom (Patent Box), Netherlands (Dutch Innovation Box), Spain (Spanish IP Box). This was introduced before BEPS recommendations 

Patent Box Regime in India

The patent box regime came to India in 2016. The name ‘Patent Box Regime’ is commonly used based on the nomenclature given to it by the country first introduced it i.e., Ireland based on its tax form as mentioned above. 

Prior to its introduction, there was already an input based research and development incentive in Indian tax provisions under Section 80RRB. This is referred to as a front end incentive. It provided weighted deduction in respect of expenditure to assessees having royalty income and hence investment linked. 

However, PBR, a back end incentive specifically was warranted for India for three reasons: 

  1. Front-end incentive could not achieve the desired result of encouraging innovation and patenting in India
  2. The ‘Make in India’ mission; and
  3. The desire to adopt a nexus approach as per the OECD project

To encourage indigenous research & development activities and to make India a global research & development hub, the Government decided to put in place a concessional taxation regime for income from patents. The aim of the concessional taxation regime is to provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products which in turn encourages companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India. 

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Section 115BBF – Dealing with patent tax in India

Section 115BBF provides a concessional rate of taxation at 10% on royalty income in respect of exploitation of patents. Salient features of Section 115BBF is provided below:

  • Applicable to any Indian resident who is a patentee (eligible taxpayer)
  • Only such patents which are granted under Patents Act, 1970 are considered
  • Patentee is any person who is the true and first inventor of the invention, whose name is entered on the patent register as the Patentee as per Patents Act, 1970 (Patent Act) and also includes joint true and first inventor
  • Total income of eligible taxpayer must include income by way of royalty
  • Royalty income is in respect of patent developed and registered in India
  • At-least 75% of the expenditure is incurred in India by eligible taxpayer for invention
  • Royalty income means any consideration for the sales
  1. transfer of all or any rights (including the granting of a licence) in respect of a patent; or
  2. imparting of any information concerning the working of, or the use of, a patent; or iii. use of any patent; or
  3. rendering of any services in connection with the activities referred in above clauses;

Royalty also includes any lump sum consideration (including advance payment on account of royalty which is not returnable) but excludes income in the nature of capital gains or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use)

  • No other expenditure is allowed under the tax provisions if concessional tax rate under Section 115BBF is availed
  • Eligible taxpayer choosing to avail Section 115BBF benefit, is required to furnish Form No. 3CFA duly verified electronically either by digitally signing it or through electronic verification mode by person authorised to sign return of income
  • Form 3CFA shall be complete in all respects and be filed on or before due date for furnishing the return of income under Section 139(1)
  • Form 3CFA requires certain general details (such as name, PAN, address of taxpayer etc),  details of patent (such as description of patent, patent number, date of grant of patent, whether granted to single person or in joint) and details of royalty income and also expenditure incurred in India and Outside India
  • Particulars of each eligible patent should be reported separately along with royalty income and expenditure details
  • The Director General Income-tax (Systems) shall specify the procedures, formats and standards for the purpose of ensuring secure capture and transmission of data and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies to furnishing and verification of Form No. 3CFA
  • Terms ‘invention’, ‘Patent’, ‘patented article’, ‘patented process’, and ‘true and first inventor’ shall have the meaning assigned to them in Patents Act
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