Tax on income from patent

1. Tax on income from patent
Bindu Sharma
Origiin IP Solutions LLP, Bangalore
Email: bindu@origin.com
Ph: 9845693459

2. How does a patent generate income?
• A patent is a form of intellectual property that gives its
owner the legal right to exclude others from making,
using, selling and importing an invention for a limited
period of years
• Patentee can give permission to any third party or the
industry to use the patent in order to manufacture, market
and sell the product
• In return he can ask for money, and this money paid to the
patentee by industry is called as ROYALTY

3. How does a patent generate income?
Patentee transfers rights to the industry
allowing it to commercialize the patent.
Transfer of right could be by:
• Licensing
• Assignment

4. Tax on income from patents
The Organization for Economic Cooperation and Development
(OECD) has recommended, in Base Erosion and Profit Shifting (BEPS)
project under Action Plan 5, the nexus approach which prescribes
that:
income arising from exploitation of Intellectual property (IP) should
be attributed and taxed in the jurisdiction where substantial research
& development (R&D) activities are undertaken rather than the
jurisdiction of legal ownership only.

5. International provisions
• Patent tax regimes are more common in European
Countries.
• Ireland was the first country to introduce patent tax
regime and named it as ‘Patent Box’ as there was a
separate Box to tick in the tax form.
• Ireland recently also modified its Patent Box regime
and named it as ‘Knowledge Development Box’
regime.

6. International provisions
Many other Countries have patent box regimes which were
introduced either before BEPS recommendation or
modelled/remodelled in line with BEPS recommendation, such
as:
• France (Patent and Royalties)
• United Kingdom (Patent Box)
• Netherlands (Dutch Innovation Box)
• Spain (Spanish IP Box)

7. Patent Box Regime in India
• Patent Box regime was introduced in India by Finance Act,
2016 by enacting new Section 115BBF.
• The name ‘Patent Box Regime’ is commonly used based on
the nomenclature given to it by Ireland
• To comply with the Base Erosion & Profit Shifting Project
(BEPS)- Action 5 (Countering Harmful Tax Practices) by the
Organization for Economic Co-Operation & Development.

8. Need for the Patent Box Regime in India
• To boost activities involving indigenous research &
development as well as to mark India as a global
Research & Development hub, the patent box regime is
brought into force by the Indian government.
• It is aimed to provide additional benefits through a
concessional taxation regime for income derived
through existing patents and encourages the
development of new patents.

9. Patent Box Regime in
India
PBR a back end incentive specifically was warranted for India for three
reasons;
a) Front end incentive was not able to achieve the desired result of
encouraging innovation and patenting in India; and
b) Government aimed at phasing out investment linked deductions
and also has ‘Make in India’ mission;
c) To adopt nexus approach recommended by OECD in BEPS project.

10. Need for the Patent Box Regime in India
The aim of the concessional taxation regime is to provide an
additional incentive for companies to:
• Retain and commercialise existing patents and
• To develop new innovative patented products which in turn
encourages companies to locate the high-value jobs
associated with the development, manufacture and
exploitation of patents in India.

11. Section 115BBF - Patent tax in India
Section 115BBF provides concessional rate of taxation
at 10% on royalty income in respect of exploitation of
patents.

12. Section 115BBF – Eligibility
• Applicable to Indian resident who is a patentee (eligible
taxpayer);
• Only such patents which are granted under Patents Act,
1970 are considered
• Patentee is any person who is the true and first inventor of
the invention, whose name is entered on the patent
register as the Patentee as per Patents Act, 1970 and also
includes joint true and first inventor

13. Section 115BBF – Eligibility
• Total income of eligible taxpayer must include
income by way of royalty
• Royalty income is in respect of patent developed and
registered in India
• Atleast 75% of the expenditure is incurred in India by
eligible taxpayer for invention

14. Section 115BBF - Royalty income
Royalty income means any income for:
i. transfer of all or any rights (including the granting of a
licence) in respect of a patent; or
ii. imparting of any information concerning the working of, or
the use of, a patent; or
iii. use of any patent; or
iv. rendering of any services in connection with the activities
referred in above clauses;

15. Section 115BBF - Royalty income
Royalty includes any lump sum consideration (including
advance payment on account of royalty which is not
returnable)
Royalty excludes income in the nature of capital gains
or consideration for sale of product manufactured with
the use of patented process or the patented article for
commercial use)

16. Section 115BBF - Patent tax in India
• No other expenditure is allowed under the tax provisions if
concessional tax rate under Section 115BBF is availed
• It is required to furnish Form No. 3CFA duly verified
electronically either by digitally signing it or through electronic
verification mode by person authorised to sign return of
income
• Form 3CFA shall be complete in all respects and be filed on or
before due date for furnishing the return of income under
Section 139(1)

17. Section 115BBF - Patent tax in India
Form 3CFA requires:
• Name, PAN, address of taxpayer etc,
• details of patent (such as description of patent, patent
number, date of grant of patent, whether granted to
single person or in joint) and
• details of royalty income and also expenditure incurred
in India and Outside India
Particulars of each eligible patent should be reported
separately along with royalty income and expenditure
details

18. Section 115BBF - Patent tax in India
he Director General Income-tax (Systems) shall specify the
procedures, formats and standards for the purpose of
ensuring secure capture and transmission of data and shall
also be responsible for evolving and implementing appropriate
security, archival and retrieval policies to furnishing and
verification of Form No. 3CFA
Terms ‘invention’, ‘Patent’, ‘patented article’, ‘patented
process’ and ‘true and first inventor’ shall have the meaning
assigned to them in Patents Act

19. Can a taxpayer choose to opt or not opt for
this section?
• Applicability of Section 115BBF is not mandatory and eligible
taxpayer has an option to avail the benefit under Section
115BBF.
• Once an option to avail the benefit of Section 115BBF is
exercised in any year, eligible taxpayer is required to continue
to avail the benefit for next 5 years.
• In case option is not exercised in any of such 5 years, eligible
taxpayer will not be eligible to take the benefit under section
115BBF for the next 5 years following such year in which
option is not exercised.

20. How is it availed?
• Form No. 3CFA is to be furnished by the eligible
taxpayer who wishes to avail the benefit of Section
115BBF.
• It is to be duly verified electronically by either a
digital signature or electronic verification by any
person who is authorised to sign income returns.
• The form should be complete and is to be filed
before the due date for filing income tax returns
under Section 139(1) of the Income Tax Act.

21. Conclusion
• Tax on income from royalty
is 10%, concessional
• Section 115BBF, Form No.
3CFA

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