One of the factors that is going to ensure that an entity remains ahead of its competition in the market in pursuance of carrying out the business operation, is that the entity is adapting to the changes taking place in the market be it in terms of new technology or methodology in carrying out the business activities. Research and development activities within the organisation help it to develop and implement new ways or products in its production method or line of products respectively. It ensures that the company maintains a competitive edge over its competitors. The development of new products or technologies by the business entities not only proves to be beneficial for them but also for the entire society as well. For e.g. if automobile industry develops vehicles which run entirely on electricity, it will not only help the companies to earn more revenue but the society will be able to reduce the usage of fossil fuel thereby reducing the carbon footprint and improving the quality of environment. Thus, in order to promote research and development activities by the companies the statute gives many tax incentives in respect of expenditure incurred in this behalf. These incentives are being categorised as R&D incentives. The document is focussed on discussion about the various tax incentives offered by the statute and the conditions that need to be fulfilled in order to avail them.
Definition of R&D:
The activities conducted under the tag of Research and Development are investigative in nature. They are the efforts made by an enterprise to improve its current products and services or to develop a new kind of product or service that will enable it to deliver better quality or retain its present quality but with improved way of production. It as an endeavour to utilise the present capacity of the organisation or to improve its capacity of delivering products and services.
Tax Incentives Provided
In case of companies the Research and development concession that have been allowed before 1 July is up to 125% of the allowed expenditures on the research and development. In some cases the up to 175% of the expenditure can be claimed as deduction. The tax offset is provided by Research and development incentive in order to encourage the companies to engage in the research and development activity. The R&D concession has two component:
- In case of certain entities that are eligible for the R&D incentive a refundable tax offset of 43.5% are allowed for companies that have turnover less than 20 million.
- For non-refundable tax offset 38.5% is allowed for all the eligible entities.
The R&D tax offset have been reduced to 30% and this changes are applicable after 1 July 2004 up to 1 July 2024.
Better operating efficiency of the businesses:
In pursuance of finding better ways of doing business or improving the quality of the product the company usually finds out for itself some new improved and efficient manner of operating. For e.g. if the company did a research on how to minimise the use of coal in its production line for the generation of power, it will come up with an alternative source of clean and efficient form of energy. This will help it in increasing its operational efficiency of the business as it no longer will have to worry about the carbon foot print it was leaving earlier thereby attracting various sorts of restrictions and stipulations from the government authorities. It will not have to worry about the disposal of the residue left behind by the burnt coal. It will be saving costs as well as will be able to curb the government interference in its business to a significant extent.
Improved business performance:
While the new and improved way of doing business increases the operating efficiency of the companies, it simultaneously leaves its marks on the financial performance of the companies. The company employing the most efficient factors of business is able to maintain a competitive edge over the competitors along with generating goodwill for the company. The customers get a better quality product and thereby becoming loyal customer of the company. This is reflected in the financial statements of the company in form of growth in revenue. As the company utilises improved way of production it is able to reduce its operating costs thereby further catapulting the financial performance of the company by increasing the profits of the company and creating wealth for the shareholders of the company.
Proper maintenance of books and records:
This is one more way in which the incentives have been able to increase the accountability of the businesses indirectly. In order to avail the benefits of the tax incentives the companies must endeavour in making and keeping proper records in respect of their expenditures and the returns they got from it. They need to keep the record of both the income and expense related to the scientific research is because of the fact that the statute has put stipulation on the nature of the expenditures that the company is allowed to make in order to avail the tax incentives. At the same the recording of income is very important because of the fact that it has been clearly spelt out by the statute that the expenditure must yield the company some benefits in real terms. Therefore in order to establish the nature of expenditure and that they are abiding by the stipulation out by the law and the authenticity of the returns earned from them the company has to maintain proper and updated records as per the guidelines of the accounting system prevalent in the country. this has ensured that the company present true and correct information in their financial statements and this in turn helps the shareholders in getting a true and fair view of the organisation financial position and performance.
Spike in the levels of research activity:
The tax incentives have motivated the business entities in engaging themselves in the research activities. This has resulted in the spike in the research oriented activities with the country. The spike not only promotes the scientific culture within the country but also opens several employment opportunities for the students and entrepreneurs who want to pursue research activities as their career choice. The research activities helps in promoting the development of new and improved products as well as ways of carrying out the business activities thereby helping the businesses as well as the society at large.
Following the provisions laid down by the tax laws:
The benefits of the tax provisions are available to only those companies which maintain full compliance with the tax laws of the statute. There are many conditions and stipulation which are needed to be abided by the companies in order to avail the tax incentives. In pursuance of getting the advantage of tax benefits the companies have understood the importance of abiding by the conditions laid down in the ITAA 1936. Non-compliance with any of the condition can cause the company to lose on the benefits of the tax incentive. With this in mind the companies have started to comply with the provisions both in letter and spirit.
Relevant Rules of Taxation
The Income Tax Assessment Act 1936 lays down several rulings with respect to the conditions that must be followed to avail the tax incentives. It also specifies the type of expenditures for which the company will be allowed a tax incentive or deduction from its total income. The ruling which specifically deals with the provisions of tax incentives for the research and development activities carried out by the organisation is TR92/2. The ruling provides us with the specific types of expenditures which are allowed to be deducted from the total income under section 73A of Income Tax Assessment Act 1936 to arrive at the taxable income of the company. There is a general ruling given out in the sub section 1 of the section 73A that only such expenditures will be allowed as deduction under this section which are not deductible under any other sections. This avoids the chances of the companies availing double tax benefits for the same expenditures incurred under different sections. The sub section also makes it clear that any company which has listed itself on any recognised stock exchange is allowed to avail the deductions in respect of the expenditure incurred on scientific and research activities only if such activity has helped it to increase its revenue generating capacity. In other words the expenditure must be incurred for the purpose of business only. The expenditures allowed as deduction from the income of the company to compute its taxable income is as follows:
- Amount paid by the company to an approved research institute for the purpose of carrying out research activities on its behalf.
- Payments made by the company to any approved research institute to carry out research in the field to which the business activities of the business belong to.
The act has not put any stipulation on the place where the research needs to be conducted by the research institute. In other words, the only thing that is crucial in determining the tax implications of the amount contributed will be whether the research has been undertaken by the institute on behalf of the company or in the field of its operation, it is immaterial whether they are conducted in the company’s premises or in the institute itself. It must be noted that the above conditions were related to the amount contributed by the company to any approved research institute. Apart, from these contributions the company can also get exemption with respect to capital expenditure undertaken by it to promote research and development activities in the organisation. There are certain purposes for which if the company incurs any capital expenditures it will not be given any exemption for them. These purposes are given in TR 92/2. They are as follows:
- Plant and machinery acquired by the company in order to conduct research in its premises.
- Any expenditure is incurred to acquire land and building or,
- Addition, alteration or extension is made by the company to the existing land and building.
The company must refrain from incurring capital expenditure for the above mentioned purposes as it will not be given any exemption for the same. Barring the above purposes all other capital expenditure made by the company will be allowable as exemption if they are incurred for the purpose of business and business only.
In order to improve the understandability of the implication of the expenditure incurred by the company for the purpose of scientific research the TR 92/2 has efficiently divided them into four categories:
- Amount that is contributed to approved research institute for carrying out scientific research activities on behalf of the company.
- All sorts of capital expenditures incurred by the company in order to carry out the research activities by the company
- The amounts spend on acquiring plant so that the same can be utilised in carrying out the research activities.
- The expenditure in respect of purchasing land and building for the purpose of carrying out research activities
Though the classification made by TR 92/2 comprise of four categories, it deals with only the first two i.e. amount contributed to research institutes and the capital expenditure incurred by the company in carrying out the research activities.
The deduction discussed above is given to the companies to instil in them the principle of research and development in order to improve the existing products or to bring in new products in the market.
However the deductions are made available to the entities only to the extent they are incurred for the purpose of gaining business profits out of them. The companies in order to enjoy the tax incentives given by or laid down by the statute must not violate the very purpose for which they have been given out to them. The government of any country loses significant amount of tax revenue in form of similar tax incentives. The companies must understand that it is their duty to give something in return to the government and the society. The statute gives out incentives so that it can reap the benefits of the new products and the added advantage they bring in with them in the society. In abiding by the conditions and regulations not only does the companies enjoy significant profits in the long run but also the society in which they are conducting their business activities gains a lot.
The benefits of the tax incentives or the implication of the incentives laid down in the statute are immense both in the context of business and social welfare. It helps in increasing the profitability, accountability and efficiency of the business entity availing the tax incentives.
Form the above discussions it can be very confidently concluded that the tax incentives provided by the section 73 A and TR 92/2 to the companies in respect of scientific research activities carried out by them has greatly and positively affected their business. It has significantly motivated them to improve their business performance and operating efficiency by researching and developing improved way of doing business. These kinds of incentives can only bring good to the companies and the society at large. Hence such incentives are a welcome move from the statute.
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