Taxing Intellectual Property

Saptaswara Chakraborty| North Eastern Hill University| 29th June 2020

Introduction

In recent times, Intellectual Property protection has gathered an immense amount of attention in the contemporary technologically advanced world. Various nations have adopted to the area of protection of IP rights due to the international agreement that is the Trade-Related Aspects of the Intellectual Property Rights within the system of the World Trade Organisation. Over the past few decades, the relevance of intellectual property has surged drastically with each countries adapting to this method for their economic development. The dominant reasons are the global competition, high innovation, high investments, need for the rapid change in technology, etc. A rather good Intellectual Property taxation and an effective royalty policy would encourage the young innovators to come up with more original and artistic work and then expand the number of technology. India has a well-developed tax situation and structure with a three-tier federal structure including the Union Government, State Government and the Urban/local bodies. Each of these bodies has the authority to receive tax based on working. The income tax is usually collected by the Central Government. In India, taxes are levied from salaries, income from house property, profits from business etc. Similarly, the other modes from where it is taken are custom duties, central excise, sales tax and stamp duty.

The tax structure of Intellectual Property in India

Income Tax- Under the provision of Income Tax, the following are the modes through which tax is collected:

• Royalty– Royalties are rather taxable income and can also be treated as business expenses. If one has received royalties from someone for the use of their property, then such an income is required to be treated as business income. Section 9(i)(vi) of the Income Tax Act, 1961 provides for the taxation of income by way of royalties. Under this Act, it states that income by way of royalty is taxable under the Income Tax Act except for situations wherein the information rights or property used or the services utilized are done by a resident, outside India, but such a use of right, property or information used is done by a non-resident in India to earn income through it
• Depreciation– Under Section 32(1)(ii) of the Income Tax, 1961 accounts for the Depreciation of assets. Such a provision concerns the patents, copyrights, trademarks, licenses, franchises or other commercial rights.
• Expenditure– Section 35A of the Income Tax Act, 1961 provides for the expenditure on the acquisition of patents and copyright rights. If such a property is acquired or purchased through a lump sum consideration with a benefit, then such a purchaser is entitled to Depreciation over the period of time. If it is paid periodically, then it can be incurred or claimed as expenditure incurred for business. Deduction however which is the capital used for the research and the development of intellectual property and which is often treated as an expense which is required to be deducted would not be applicable in the case of amalgamating companies.
• Deduction– Under Section 80 GGA, it talks about other deduction for the purpose of scientific researches. Moreover, the research work for the development of a patent comes under the category of scientific research. However, under 80 OQA, a deduction shall be allowed from any income that is obtained by the author through his profession on account of a lump sum consideration on the grounds of the assignment done or the grans received.

Goods and Services Tax- With the advent of GST, there arises a need to classify the transactions which involve the Intellectual Property as something which involves either the rendering of services or the sale of goods and is therefore absolved. The GST since it is categorized as being concurrent with the Centre and the State both levying taxes on it as a joint base. When taxes are to be levied on intra-state supply of goods and services by the Centre, then it is called as the Central GST, and when the State including the Union Territories levies it, such is called as the State GST.

Section 9 of the CGST, 2017 states that the CGST shall be levied on the said transaction value or the price paid or payable for the said supply of goods and or services at a rate that has been notified on the recommendation by the GST council. Transfer of temporary or permanent goods or Intellectual Property right in respect of goods or enjoyment of services other than the Information technology software at a rate of 12% and for the transfer of temporary or permanent goods or Intellectual Property right in respect of goods or enjoyment of services including the Information Technology software at a rate of 18%.

Startups and SME’S- Start-ups is an industry which has been in existence for a period of not more than 7 years and which has a turnover of not more than 25 crores. On the other hand, a SME’S are enterprises which have an investment in itself up to 1 crore in Machinery an Plants. Post recognition of a Start-ups may apply for Tax exemption under Section 80 IAC of the Income Tax Act. This Act provides for an exemption to the recognized startups for 3 consecutive years. The main reason for providing such a benefit is intended to catalyze startup culture and to build a durable startup ecosystem for innovation and entrepreneurship. Similarly, with regard to MSMEs, the Government has invested hugely in order to support the medium and micro-enterprises. The Support for International Patent Protection in Electronic and Information Technology. (SIP-EIT) is a scheme which has been launched by the Department of Electronics and Information and Technology to provide for the financial support to the MSMEs.

Remark

Intellectual property and its taxation have come a long way with the property rights being recognized and taxes are therefore levied on it. The exemption having been provided to the startups would help in innovation, and thus such a step is necessary in order to attract more amount of investments.