The Tax Saving Secret Businesses Need To Know About

The Tax Saving Secret Businesses Need To Know About

The Small, Medium and Micro Enterprises (SME’s) industry in the country is teeming with a multitude of businesses. The government has introduced a number of schemes to empower this sector and encourage indigenous products. However, these businesses are often oblivious to the variety of schemes running and lose out on substantial benefits. One such scheme that helps with tax saving is the R&D Tax Credit Scheme that was introduced to encourage small businesses to take risks and invest in research and development (R&D).

What is the R&D Tax Credit Scheme?

This was a scheme introduced by the Department of Scientific and Industrial Research (DSIR) under the Ministry of Science and Technology aimed at the R&D departments of manufacturing industries. The scheme gives the status of In-House R&D Centre to these departments in the form of a DSIR accreditation which gives them a slew of direct and indirect tax benefits. It was directed at encouraging small companies to manufacture and sell indigenous products in tandem with the vision of the Make In India program. The accreditation is valid for 3 years after which you need to renew it via a simple renewal process.

What are the benefits of this scheme?

If your manufacturing company has been granted an In-House R&D Centre status through DSIR accreditation, you can avail a number of income tax benefits, some of which are listed below-

  • Up to 200% deduction (weighted deduction) on both revenue and capital expenditure (under Sections 35(1) and 35(2) respectively)
  • 100% Exemption from excise and customs duty
  • Duty-free import on analytical and specialty equipment
  • Donations or payments made to approved Scientific and Industrial Research Organisations (for R&D activities carried out outside of your facility)
  • Higher depreciation allowance for plant and equipment involved in indigenous product manufacturing
  • Excise duty waiver on any product that has been designed and developed by a wholly India company and patented in any two countries out of India, USA, Japan and the EU
  • Exemption from price control on drugs
  • Loans and Grants for any form of industrial R&D

You can look up all the benefits of this scheme here. While these only lists out the direct tax-saving benefits, there are many more indirect ones.

Companies often apply for a DSIR accreditation also for strategic benefits such as quick customs clearance when importing drugs and other time-dependent products for critical research. A number of funding schemes, bilateral and Government of India, too have now begun to make a DSIR accreditation mandatory to apply for funding. A DSIR accreditation has become a matter of prestige as it is no easy feat to get accredited. To give you an idea of the stringency of granting this accreditation, over the past two years only 3 out 4 companies that have applied for this recognition have actually received them. This primarily due to the lack of understanding of the scheme in general and to complete the entire application.

Am I eligible? How can I apply for this?

If your manufacturing or production company has been actively involved in innovating your company’s product based on customer feedback, chances are you already qualify as having a functional R&D department. Most often, small businesses do not realize that they’re involved in R&D because they may not have a department exactly by that name. All you need to check for is if your company falls under sectors mentioned below.

  • Bio-Technology
  • Drugs
  • Pharmaceuticals
  • Production of seeds, Manufacturing of Agricultural implements
  • Electronics Equipment
  • Computers
  • Telecommunication Equipment
  • Chemicals
  • Automobiles & Automobiles components
  • Aviation Aerospace
  • Seeds Manufacturing Industry
  • Non-ferrous Metals
  • Petrochemicals
  • Sugar
  • Consumer Durables Sector
  • IT & BPO/KPO sector
  • Health & FMCG
  • Engineering & construction
  • Oil And Gas
  • Power and Power Generations
  • Manufacturer of Generating Sets
  • Energy, Utilities & Mining
  • Steel
  • Manufacturer Of Tubular Components -Useful For Oil Refineries, Power Plants, Nuclear Plants, Ship Building Yards and Other Plants for Manufacturing Units
  • Lighting and Signalling Equipment Manufacturing Unit
  • Industrial Products
  • Process Manufacturers
  • Life Sciences
  • Energy and Renewable Energy
  • Solar Industry
  • Photovoltaic Industry
  • Micro Electronic Industry
  • Health Care
  • Semiconductor Equipment Industry
  • Plant Manufacturers
  • Textiles
  • Forest, paper & packaging
  • Aircraft, Aerospace Aviation
  • Blending of various categories of TEA (Organic, Chemical, Herbal, White, Green & others)
  • Coffee & its Blending
  • Standardisation Pasteurisation etc. of Milk & Other Products
  • Any other article or thing notified by the Central Board of Direct Taxes
  • All Type of Manufacturers
  • Any other article or thing notified by the Central Board of Direct Taxes

Once you have ascertained your eligibility, you can apply for your DSIR recognition. After the necessary paperwork has been submitted, it takes anywhere from three to six months for the approval to come through. You can also expect a visit from DSIR to the R&D facility before it approves your application. Apply for your DSIR accreditation keeping in mind when you would need to file taxes for the coming year; nobody would want to miss out on substantial tax savings. Once your company receives an In-House R&D Centre status, you can claim tax benefits when you file your taxes for the coming year under different heads under Section 35.

While the R & D Tax Credit scheme is a necessary encouragement to research and development in India, there still seems to be a disconnect in the scheme and the number of DSIR accredited companies. It was noticed that there only 1800 DSIR recognized companies out of the ≅1.4 million SME’s in India in 2016. This clearly points to a lack of awareness of the scheme and its benefits. Ensuring the awareness of this scheme among SME’s and imparting the necessary expertise to avail this scheme, will benefit the industry from strategic and financial points of view.

MSME Development Act passed by GoI in 2006 is another boon for Indian Businesses, here is an analysis of the Act.