India’s New Patent Box Regime

Patent Box refers to a special text regime for “income from patents” or “intellectual property revenue”. It is also known as IP-Box or Innovation box. It was first introduced in France, and thereafter spread to other European countries such as Belgium, Hungary, Luxembourg, Netherlands, Spain and the United Kingdom. In UK, Patent Box allows a 10% tax rate on profits derived from intellectual property. In India also, the Union Budget 2016-17 had introduced a special patent regime.

Important Facts

• Likewise the other countries in Europe, India also has a patent box regime.
• As per this regime, any company will be able to pay 10% tax on income from worldwide commercialization of patents which are developed and registered in India. This is a concessional tax regime because otherwise, the 30% Income tax was applicable to income from patents/ royalty / intellectual property in the country.
• The condition is that such patent must have been developed and registered in India under Patents Act, 1970.
• This box is applicable for all patents registered after April 1, 2016. The eligible assessee is a person resident in India, who is the true and first inventor of the invention and whose name is entered on the patent register as the patentee in accordance with Patents Act, 1970.
• Patent Box has been kept out of the BEPS {Base Erosion Profit Sharing} rules which say that income from intellectual property should be attributed to the country where substantial R&D has taken place and not the country of legal ownership.

Questions for Analysis

• What is the objective of new patent box regime?
• What is experience of other countries with patent boxes?
• What is the ground condition of creation of Intellectual Property / patents in India?
• Has enough been done to attract creation of IPs in India? If not, what are suggestions and way forward?

What is the objective of new patent box regime?

The objective of Patent Box Regime or concessional tax regime is to give incentive for companies to commercialize existing patents; and also develop new patented products. This is expected to boost “Make in India” programme. The Government expects to support the knowledge-based industry and also companies across sectors to create high-value jobs related to development, manufacture and exploitation of patents in the country. It will encourage to develop and register a patent within the country and not out-license it to foreign companies {this was done by some pharma companies}.

What is experience of other countries with patent boxes?

As discussed above, the patent box regime was first introduced in France and then in other countries. In 2013, UK had also set up such box to encourage the companies to retain their IPs within UK. However, UK was criticised for artificially shifting profits. That was the time when discussions on BEPS were on climax and UK was accused of using harmful tax practice. However, UK not only defended its position but also was able to continue to have such regime firm in place. Initially, UK had agreed to discontinue its patent box but then under BEPS new rules called “modified nexus approach” were designed to ensure that economic activity that actually takes place within the country that grants R&D tax break. This modified nexus approach was proposed by UK and Germany only. India used this as a clue to announce its own patent box. UK has been a beneficiary of the patent box, as the GlaxoSmithKline made an additional investment of £500 million only because of patent box.

Another country to implement patent box was Netherlands, which had initially put a scheme in 2007 but later modified it in 2010 as Innovation Box. It charges 5% income tax on income from intellectual property.

Similarly, Ireland applies zero tax subject to an income cap.  Switzerland, Belgium, Luxembourg etc. are other such countries with patent boxes.

What is the ground condition of creation of Intellectual Property / patents in India?

The number of patents created in India is very less in comparison to other countries. In 2015, some 57000 international patents were filed in United States, 44000 in Japan, 30000 in China while only 1423 in India. The same is story with trademarks, industrial designs and so on. As per World Bank’s 2012 Knowledge Economy Index, India’s rank is 100, which is abysmally low.

Has enough been done to attract creation of IPs in India? If not, what are suggestions and way forward?

The first thing is that what the government has done is laudable, despite its limited scope. There is a need to protect and promote patent developments in pharma, electronics, chemicals, energy, aviation and so on.

Secondly, India needs such concessionary tax regime for not only patents but also copyrights, trademarks, industrial designs also. Thirdly, the patents are filed in early stages of development; but later further innovation is needed to make them marketable. The government in later stages can think about that also.