Corporate Tax (R&D Tax)

Overview of Corporate Tax (R&D Tax) 

Over the years, India's research and development (R&D) environment has seen substantial expansion and improvement. India has been a popular location for R&D activities thanks to its large scientific and technical skills reservoir. The nation has actively promoted an innovation- and technology-driven culture, which has increased R&D spending in various industries. The government has also offered subsidies and tax breaks to entice companies to spend money on research and development. For qualifying R&D expenses, the Income Tax Act offers tax deductions and exemptions. These incentives have encouraged domestic and foreign businesses to open R&D centers in India, enhancing the R&D environment.  

A direct tax that is levied by the government on a company's profits is a corporate tax. The rules established in the Income Tax Act 1961 are followed while imposing this tax. Tax credits for research and development are helpful incentives that the government offers to recognize and reward businesses for their investments in innovative activities. Companies can receive tax benefits through corporation taxes (R&D), but only if required to pay corporate taxes. 

Table of Contents

Section 35 of Income Tax Act, 1961 – Benefits and claims for the expenses associated with Scientific Research 

• A company can claim a full deduction for revenue expenditures incurred while pursuing research and development (R&D) operations.
• Capital expenses for scientific research performed in-house are fully deductible.
• If a corporation incurs capital expenditures for scientific research before commencing its business, it can claim a 100% deduction, but only for expenses made within three years of starting the business.
• A taxpayer can deduct 100% of payments from an authorized Indian entity for scientific research.
• Deductions can be claimed by foreign corporations through their registered Indian firms.
• 100% contribution for the taxpayers who give or donate to organizations such as colleges, universities, or corporations interested in scientific, statistical, or social science research can also benefit from income tax credits. 
• By receiving authorization from the Income Tax Authority, taxpayers can claim a 100% deduction on donations made to firms engaged in scientific research activities.
• Under the Income Tax Act, the Government has offered conditional tax advantages for costs spent or donations made to third parties. This comprises both Indian and international firms that spend on scientific research cost in India and are eligible for tax breaks. 

Benefits of claiming (R&D Tax)

• Financial Savings
• Increased Cash Flow
• Encouragement for Innovation
• Competitive Advantage
• Risk Mitigation
• Talent Attraction
• Technological Advancements
• Economic Growth
• Enhanced Productivity

Requirements for claiming (R&D) Tax 

• A company must be registered as a legal entity in India to be eligible for R&D tax incentives. This includes registration under the Companies Act of 2013, as well as other applicable regulations, such as partnerships or limited liability partnerships (LLPs).
• Three financial years should be completed since the start of the business.
• The Company's R&D activities must qualify for tax benefits in accordance with government requirements. The definition of acceptable R&D activities varies by industry and sector, but it typically entails systematic and exploratory efforts aimed at discovering new information or developing new goods, processes, or services.
• R&D operations should be carried out on business premises or in dedicated R&D facilities (with a minimum area of at least 1000 sqft).
• Companies must keep adequate Paper works and records of their R&D efforts, such as project information, technical reports, invoices, and other pertinent papers. These Documents are vital throughout the tax assessment process since they serve as Paper works of the permissible costs spent during the R&D process.
• For carrying out the activities related to R&D, there should be enough technically skilled personnel accessible.
• The company must provide evidence that the R&D units only work in the locations which are designated by the central government and not in residential areas.
• Companies seeking R&D tax credits must follow all applicable regulations, standards, and reporting criteria outlined by the government. This involves completing the Documentwork, giving accurate information, and sticking to the deadlines for claiming tax breaks.

Necessary List of Documents 

The following Documents are generally necessary to claim R&D Tax Credits: 

1. A CD with a presentation about the R&D unit and its activities: This presentation should include an overview of the R&D unit's aims, initiatives, processes, and results.
2. The company's most recent annual report: The annual report should include pertinent information about the company's financial performance, as well as specifics on R&D activities carried out throughout the reporting year.
3. A full description of R&D units' research and development activities: This note should provide a detailed explanation of the R&D activities carried out by the R&D units, such as the scope, objectives, techniques, and outcomes of the research projects.
4. R&D unit details: This information should include the infrastructure accessible for research, as well as the installation date, unit value, and employees working on the projects, as well as their credentials and designations.
5. R&D unit designs: The drawings should depict the physical layout and design of the R&D units, as well as a visual representation of the infrastructure and facilities utilized for research and development.
6. A copy of the Memorandum and Articles of Association of the Company: This Document proves the legal existence of the business and contains information about its structure, purposes, and governance.

Procedure to obtain the tax credits 

The following stages are involved in acquiring R&D Tax Credit: 

Stage 1: Application Submission:   Prepare an R&D Tax Credit application, which should be signed by the company's Managing Director or a full-time director. Include all relevant papers in accordance with the criteria. 

Stage 2: Verification of Documents:  The administrative entity in charge of the R&D Tax Credit programme will check and verify the submitted papers to ensure correctness and compliance with the rules. 

Stage 3: Application Review:  The authority thoroughly investigates the application and accompanying papers to determine if the R&D activities and costs claimed for the tax credit are eligible. 

Stage 4: Evaluation and Approval:  The authority examines the application based on the verification procedure and, if deemed satisfactory, grants the R&D Tax Credit. If necessary, this stage may include additional contact or clarification from the authorities. 

Stage 5: Tax Credit Allocation: Once the application is granted, the R&D Tax Credit is allocated to the firm, either as a direct decrease in tax burden or as a refundable credit, depending on the applicable laws. 

How will Enterslice Help You?

Enterslice provides thorough assistance with obtaining R&D Incentives:

• Enterslice help companies compile vital data, finish application forms, specify qualifying expenses, facilitate claims, offer support services, and determine eligibility.
• Enterslice’s team of expert, who have the knowledge to assist businesses in making the most of their R&D incentive options.