ABSTRACT

PATENT TAXATION REGIME:INDIA’S INCENTIVE FOR INNOVATION

Patent is a grant of protection for an invention. India is now bringing its own tax benevolence
regime for patents i.e. inventions made in India, by virtue of a concessional tax regime under the
Indian Income Tax Act, 1961 (‘the Act’). The finance minister in his budget speech mentioned
that "Research is the driver of innovation and innovation provides a thrust to economic growth. I
propose a special patent regime with 10% rate of tax on income from worldwide exploitation of
patents developed and registered in India". Therefore as part of the measures to promote socio-
economic growth, India’s proposal to provide a special tax regime for incentivizing Research &
Developments (R&D) and to spur commercialization of domestic R&D by taxing patent
revenues differently from other commercial revenue is a much needed fillip and is indeed
welcome and heartening.
However it is worthwhile to note here that this patent tax incentive regime is definitely not
India’s innovation and many countries across the globe have initiated such tax incentive
measures to promote research & new innovations. Ireland, a tax friendly country which came
into severe criticism in the recent past for its controversial tax mischief legislation viz., Double
Irish tax relief is ironically the first country to introduce such a tax incentive regime for
innovation by naming it as ‘Patent Box’ (so-called because there is a box to tick on the tax form).
Ireland recently has modified its patent box regime and now it gives it’s a new nomenclature as
‘Knowledge Development Box’. These tax incentive regimes are often called Patent Box,
Innovation Box or License Box regimes.
First and foremost it is imperative to understand that there are certain R&D related tax incentives
provided under the Act by virtue of investment linked incentives, which are different from the
Patent tax regime. Patent Tax concessional regime is primarily a ‘back end’ incentive i.e. they
apply after the technology is developed thereby encouraging inventors to maintain their patent in
the country where it was developed. The investment linked deductions available for research
and development in the Act is the front end incentive promoting innovation strategies. However
in order for domestic businesses to be globally competitive, commercialization of such R&D is
essential for economic growth. Hence in those lines, the Patent tax regime has evolved.