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FinMin's innovation boost

Business Standard:  February, 2014

Contributions to this body will be eligible for tax benefits

New Delhi: Finance Minister P Chidambaram announced a plan to set up a Research Funding Organisation for scientific research and to support applications and inventions.

It is to fund research projects selected through a competitive process. Contributions to this body will be eligible for tax benefits.

“The Income Tax Act allows deductions for expenditure on scientific research but it is limited to direct funding,” said Chidambaram in his interim Budget. “We have reflected on a new approach to funding scientific research.”

By encouraging corporations to invest on research and development, the government aims to boost innovation.

Rajiv Chugh, tax partner at audit and consultancy firm EY said currently any company which has its own which its own R&D centre is eligible for deduction which double the expenditure incurred.

“But for that companies have to create such centres in their individual capacity, so what the FM has created is an organisation which can get funds from various corporate that can be then utilised to fund other ventures.”

However, the mechanics of how the deductions will be made have to still worked out. Chugh added that it is not clear if the deduction will be under section for charitable activities or under the corporate social responsibility (CSR) clause introduced in the new Companies Act.

According to the new legislation, two percent of profits have to be mandatorily invested towards CSR by companies having a net worth of Rs 500 crore or more; or a turnover of Rs 1000 crore or more; or a net profit of Rs 5 crore or more.

A statement from IT industry body Nasscom said for technology driven sectors like engineering and R&D, funding is always difficult as technology is yet to be recognised as collateral to offset risks and therefore, the proposal to set up the organization is welcome. “We will work with the Government on how best to scope the objective and research areas for funding to build India’s leadership in technology,” it said.

According to various reports, Indian IT firms spend around only around two per cent of their total revenues on research and development (R&D) against seven-eight percent by North American companies.

Despite the fact that of the top 500 spenders on R&D, 228 have centres in India, investment by Indian-origin companies on research remains minuscule. India’s largest IT services company, Tata Consultancy Services, spent Rs 777 crore last financial year on R&D against Rs 603 crore in the previous year, while Infosys spent Rs 913 crore last financial year against Rs 660 crore in 2011-12. However, as a percentage of total revenue, it is only 1.23 per cent for TCS and 2.5 per cent for Infosys.

“Through this proposal, the government is trying to promote hi-tech engineering and high-skilled labour in the country,” added Chugh.