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Benefits related to Research & Development expenses under Income Tax Act.
Arjuna (Fictional Character): Krishna,
ISRO succeeded in Mars mission by launching the largest rocket GSLV
Mark III in space after lot of efforts and spending crores of rupees on
research and development. Similarly if businessmen carry out such
R&D, etc. activity, then is there any provision of Income Tax which
benefits him?
Krishna (Fictional Character): Arjuna,
hats off to the Indian scientists. Today due to all the research
activities, the world has developed. Therefore government also
encourages research in business. Industrialists give more emphasis on
research and thereby invent and manufacture new goods. In many
industries like pharmaceutical, automobile, engineering, electrical,
etc. new research projects are always being initiated. In this a lot of
money is expended or invested. If research project succeeds then after
selling product profit can be earned, otherwise loss has to be faced.
Companies like Apple, TCS, Google, etc. are succeeding because of
research. Under Income tax act, additional deduction for such expenses
is given.
Two types of expenses such as Scientific
Research and Research and Development are covered. Additional deduction
is also available as per conditions mentioned there in.
Arjuna: Krishna, How and on which research expenses can a taxpayer take benefit?
Krishna: Arjuna, the Income Tax Act gives benefit in two ways
1) Expenditure incurred for carrying
research in own business. In this for Scientific Research deduction of
100% of expenditure and for Research and Development deduction of 200%
of expenditure is given
2) If contribution is made to other
specified institutions or companies for incurring research then
deduction of 125%, 175% and 200% can be availed. Please understand
carefully, these deductions are available on approved expenditure if
incurred and to approved organizations if contributed. All businessmen
can take the benefit of this. But due to unawareness many do not take
benefit of this.
Arjuna: Krishna, in first type, how can the businessman take the benefit of 100% deduction?
Krishna: Arjuna, 100%
deduction is available on the expenses incurred on specified scientific
research. As per section 35 (1) of Income Tax Act deduction is available
for revenue expenditure. However as per section 35 (2) of Income Tax
Act deduction is available for capital expenditure also. The 100%
deduction is available in the year in which capital expenditure is
incurred. But depreciation is not allowed on this capital expenditure.
Further if land is purchased then deduction is not available. For e.g.
for scientific research if machine is purchased or for a laboratory an
air conditioner is purchased then in that year 100% deduction of it can
be availed. Further expenses incurred in earlier three years before
starting business is also allowed for deduction. It means for starting
new business theses provisions are beneficial.
Arjuna: Krishna, in second type, for research and development, how can the taxpayer take the benefit of 200% deduction?
Krishna: Arjuna, as per
section 35 (2AB) of Income Tax Act manufacturing company only can take
deduction under this section. This deduction is available to approved
in-house research. In this 200% deduction is available on revenue as
well as capital expenditure. However it cannot avail other deduction of
section 35.
For e.g. if any company wants to undertake
research for manufacturing products and the said project is approved
and company incurred Rs. 10 Lakhs for capital expenditure and Rs. 8 Lakh
revenue expenditure then the company can avail deduction of Rs. 36
Lakhs. This provision is very beneficial. Because in this deduction of
twice amount of the expenditure is available and at the end lesser
income tax will have to be paid. In this from of tax planning one can
save tax and encouragement for developing, innovation, research is also
initiated. Thus it’s useful for developing business also. For e.g.
Indian companies like Reliance, Telco, Maruti, Wockhart benefit from
this and continue the research work and save taxes by following the
laws.
Arjuna: Krishna, in
second type of deduction, if taxpayer makes contribution to other
organization for scientific research then does he get deduction?
Krishna: Arjuna,
deduction is available on the basis of contribution made to which
organization and for what purpose. In this there are the following three
types:
1. As per section 35 (1) (ii/iii) of the
Income Tax Act if contribution is made to approved research organization
or college or university for scientific research then 175% of deduction
is available. Further this contribution may or may not be related to
business. For e.g. if taxpayer has given Rs. 100,000/- to an approved
research organization for scientific research then in that year the
taxpayer can avail deduction of Rs. 175,000/-. Further if contribution
is made for social or statistical research then deduction of 125% can be
availed.
2. As per section 35 (1) (iia) of the
Income Tax Act if contribution is made to approved company for
scientific research then deduction of 125% can be availed.
3. As per section 35 (1) (2AA) of the
Income Tax Act if contribution is made to National Laboratory or IIT or
University for specific scientific research then weighted deduction of
200% is available to the taxpayer.
For e.g. if taxpayer has made a
contribution for scientific research to IIT of Rs. 100,000/- then it can
avail deduction of Rs. 200,000/-. Any businessman can avail deduction
under these provisions and they can have research related results in
their business.
Arjuna: Krishna, What should one learn from the research and income tax provision?
Krishna: Arjuna, research
is a continuous process. In India for encouraging research in
industries there are various schemes. Western countries like America
always encourage research, therefore business flourishes there and in
this there is major contribution of Indian Scientists. If they get
opportunity in India then Indian Industries will also flourish. New
products are developed by research. In practical life, due to new
products, festival shopping becomes more joyful. As in Christmas gifts
are given. New thoughts, ideas, inventions, research are the need of
life. Therefore it can be said that real wealth is hidden in research.
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