When wishes became horses–PM Modi’s Silicon Valley playbook

Effective 1 April, one of those wishes have come true. India has adopted a concessional rate of corporate tax for income earned out of a patent registered and developed in India. The reduced rate, of 10% (plus applicable surcharge and cess) is meant to encourage companies to build intellectual property (IP)-based businesses out of India. Such a tax provision was first started by the United Kingdom as the “Patent Box”, but many countries have since followed suit making them sought after destinations for IP-based business deals.

Other than the tax consultants, few in India know about it. But this must be called out as a template for fixing what is broken in the Indian innovation infrastructure. Seek, consult, act and implement; all in a matter of 18 months.

“It’s a very clean tax law. Since it is based on self-assertion, you are not dependent on anybody to approve or deny you the benefit. You don’t even require an auditor certification,” says Vishal Gada, a partner at the law firm Dhruva Advisors in Ahmedabad.

Beyond the Box

Tax is an integral part of what IP-driven companies do. License or sell their IP, use that one-time payment, royalty or milestone earning to do further Research and Development (R&D) and innovate. But when 30-35% of that earning goes in tax, it hits where it hurts the most. Because you can always write your past losses into it, but not your future losses. In the commercially fallow period when fresh IP is being built, there’s no income. And few investors like to bankroll it.

“This isn’t innovation friendly,” says an entrepreneur who set up an office in the UK after its Patent Box came into effect in April 2013. He declined to be named.

Unarguably, India’s own Patent Box coming into force in the current financial year is a significant development. If seen against what the government is offering under the Startup India incentives, the relief couldn’t be starker. The five-year tax break under the latter comes on the back of much paperwork and approvals, which may fall at the mercy of third-party discretions.

Still, as stakeholders pore over the notification, some of them find scope to amend the Box. Like when a patent already begins earning for an inventor but it’s officially not been granted due to the slow and long process at the patent office. “Registering a patent in India, practically, may take up to 5-10 years,” says Gada. Hence, any recent invention being lined up for registration with the patent authorities may be eligible for 10% income tax rate under these provisions only after a few years (if commercial exploitation started prior to registration). “There is a case to represent before the government to relook at this scenario and consider providing tax incentives in the intervening period till the patent gets registered,” he says.

Then there are some who believe that there’s a restriction on the inventor in terms of getting in and out of the Patent Box benefits. For instance, a company opts to be taxed under this Section for any financial year, say FY17-18, and it opts out of the same in any of the consecutive five financial years, say in FY20-21. Then it shall not be eligible to avail the concession even for the next five consecutive financial years. In this example, up to FY25-26.

But this seems like a clever clause. Particularly relevant in India where, for many decades, companies have looked at R&D to be merely a tax sop, not a means to invent.

“This simply means you cannot pick and choose your years. That you cannot set off this loss [from pursuing IP generation] against anything else. Say, normal profits,” explains Girish Vanvari, national head of tax at KPMG, India.

Well begun, half done

As far as the financial side of patent commercialisation goes, the new provision is as good as it can get. But what if the patent protection itself is weak? So weak that it deters inventors from filing patents in India.

“Your patent is only as good as your ability to enforce your rights,” says Ashok GV, a partner at Factum Law in Bengaluru. The enforcement of patents remains a problem because the benefits of the Commercial Courts Act haven’t trickled down to all parts of the country. Since there’s no certainty of time-bound results, patents often end up representing little more than prestige and academic value, says Ashok.

 

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