BACKGROUND

Accroding to the recent news reports, Law Commission has recommended repeal of 258 laws, which have lost their relevance in today’s day and age.

One of the statutes which the Government ought to consider repealing is the Research and Development Cess Act, 1986 (‘Act’).

The Act was introduced in 1986 for the levy and collection of Research and Development Cess (‘R&D Cess’)on all payments made for import of technology for the purpose of encouraging the commercial application of locally developed technology.

Under the Act, ‘R&D Cess’ is levied at the rate of 5% on all payments made by an industrial concern for import of technology into India under a foreign collaboration.

Technology has been defined under Section 2(h) of the Act to mean –

• Any special or technical knowledge
• Any special service required for any purpose
• Designs, drawings and publications
• Technical persons coming to India

‘Industrial concern’ has been defined under Section 2(e) of the Act and has the meaning assigned to it in Section 2(c) of Industrial Development Bank of India Act, 1964 and includes any other person in whose favour a foreign collaboration involving the import of technology is approved (whether automatically or otherwise) in accordance with the Industrial Policy of the Government of India.

The term ‘foreign collaboration agreement’ has not been defined under the Act.  However, the term ‘collaborate’ has been defined in the Oxford Dictionary to mean ‘work jointly on an activity or project’.

Thus, owing to the wide definitions of ‘technology’ and ‘industrial concern’, R&D Cess is payable with respect to the payments made towards bringing technology, drawings, designs, special service or technical persons into India from a place outside India. This is undertaken by means of an arrangement or agreement between variousparties located in India and outside India.

Proceeds of R&D cess collected under the Act are first required to be credited to the Consolidated Fund of India and thereafter these are transferred to the Technology Development Board, in accordance with the appropriation made by the Parliament through Finance Act.

Non-payment of R&D Cess may attract penalty upto 10 times the amount of Cess payable.

WHY THE ACT SHOULD BE REPEALED?

Currently, Service Tax @ 12.36% is applicable on payments made towards import of technology, technical person coming into India etc. To put it differently, Service Tax under reverse charge mechanism is applicable on almost all the payments which are subject to 5% R&D Cess under the Act.

In order to avoid the double taxation, Service Tax notification no. 14/2012 dated 17-03-2012 provides for exemption from Service Tax to the extent of payment of R&D Cess made under the Act, subject to fulfillment of certain conditions.

Given this, payments made towards import of technology are generally subject to R&D Cess @ 5% and Service Tax @ 7% (plus applicable Education Cess and Secondary and Higher Education Cess).

If the Cess is repealed, such payments would be subject to Service Tax @ 12% (plus applicable Eduction Cess and Secondary and Higher Education Cess).

Therefore, the repeal of R&D Cess would not have any major impact on the Central Government’s revenue because Service Tax at full rate would be collected on various payments that are currently subject to R&D Cess. On the other hand, the repeal will result into savings in Government’s cost of collection.

Similarly, for Taxpayers, the elimination of R&D Cess would lead to reduction in cost of compliances, as they would not need to spend time and efforts for depositing the R&D Cess and maintaining a record for the purpose of the Act as well as Service Tax law (i.e. for claiming the exemption).

Another justification for repeal of the R&D Cess is that the amount of R&D Cess deposited is a cost for manufacturers since the benefit of Cenvat credit is not availableon a reverse charge mechanismuponsuch payments. In other words, while it is true that R&D Cess can be deducted from the Service Tax payable, is nevertheless a cost for the manufacturers as Cenvat credit is restricted to the reduced Service tax amount deposited.

To illustrate this, we assume that a manufacturers pays Rs.100 for import of technology.  Accordingly:

R&D Cess payable @ 5% = Rs.5 (A)

Net Service Tax payable @ 7% (12%-5%) = Rs.7 (B)

Total amount payable to government = (A)+(B) = Rs.12 (C)

Cenvat credit available = Rs. 7, i.e. equal to (B)

Loss of Cenvat credit = (C)-(B) = Rs.5

It is apparent that in normal circumstance, i.e., sans R&D Cess, full Cenvat credit of Service tax amounting to Rs. 12 (without education and secondary and higher education cess) is available to a manufacturer. However, with R&D Cess, while payment made by a Manufacturer to government is Rs. 12, the Cenvat credit amount is Rs. 7 only.

Thus, currently manufacturing concerns are burdened with 5% R&D Cess on importing latest technology for manufacturing goods in India. This discourages import of latest technology for carrying out manufacturing operations in India.  Thus, in the current scenario, where the incumbent government is inviting foreign companies to set-up industries in India under the ‘MAKE IN INDIA’ policy, R&D Cess is clearly a hurdle.

Even otherwise, due to lack of administrative set-up, it is difficult to monitor collection of R&D Cess. As per official website of the Technology Development Board (‘TDB’), between 1996 till 2008 (i.e. 13 years), Rs.1533.25 crores was collected as R&D Cess. This means annual collection of Rs. 118 crores approximately.  Basis this number, the amount paid for technology import by manufacturing concerns works out to Rs. 2,359 crores per annum, which is prima-facie very low.  This clearly advocates the repeal of R&D cess and collection along with Service Tax for better enforcement.

Another important point to be noticed is that the R&D Cess has not fully served the purpose for which it was introduced.  Out of Rs. 1533.25 crores collected as R&D Cess, only a sum of Rs. 501.42 crores was allocated to TDB for development of indigenous technology over the period of 13 years. Clearly, the desired result of development of indigenous technology through TBD is low.  In any event, the allocation may be made to TBD through budgetary allocations from the amount of higher Service Tax collection.

For the reasons mentioned above, the Government should include the R&D Cess Act in the list of laws which to be repealed in the upcoming Winter Session of Parliament and provide much needed respite to the manufacturing sector from this irrational levy. The repeal would certainly be a step in the right direction of improving India’s ease of doing business ratings and making India a preferred manufacturing destination.