In September 2015, when Prime Minister Narendra Modi visited Silicon Valley, a bunch of entrepreneurs were invited for a dialogue. Orchestrated by the Confederation of Indian Industries, the elite group was called to discuss what would make India tick for innovators. To the disappointment of many, the crowd was not large enough. Hence, the prime minister ended up spending less than the stipulated time. When he arrived, he said, “Every successful person I ask, they say they went to Singapore, London, Switzerland…Nobody stays in India. If you all can give one suggestion—do this and I am not going to leave India—I’ll make it happen. Make only one wish. If you make two, you’ll be disqualified.”
Soon after the monologue, the 20-plus entrepreneurs present there were given an email id. They were asked to send their ‘one thing’ that needed to change for the innovators to stay put in India, recalls an entrepreneur who was present there but doesn’t want to be identified.
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.