The Government has amended the Income Tax Act by incorporating a new provision announcing reduction in Tax Rate on the Royalties earned by any person resident in India (including corporate Patent Owners). The reduced tax rate on Royalties will be 10% as opposed to the Prevailing Corporate Tax Rate of 30%+. The Provision will be made effective 1st April 2017. The provision requires the following qualifications:
Royalties in respect of a patent, means consideration
(including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains” or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use)
The Newly Introduced Section 115BBF of Income Tax Act 1961 (Effective 1st April 2017)
(1) Where the total income of an eligible assessee includes any income by way of royalty in respect of a patent developed and registered in India, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of royalty in respect of the patent at the rate of ten per cent.; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the income referred to in clause (a).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the eligible assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).
Clearly the provision is a welcome move for Indian Companies that own patents and are willing to license or engage in Transfer of technology covered by such Patents. Some examples would be companies that outsource manufacturing to third parties (in Pharmaceutical or FMCG Industry) or Software companies that provide non-exclusive or exclusive licenses to their customers for the use of software or solutions that are backed by Patents.