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TMI BlogConcessional tax regime for Patent Royalty Income for resident patentees: Clause 194 (Table: S. No. 2) of Income Tax Bill, 2025 Vs. Section 115BBF of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... able: S. No. 2) of the Income Tax Bill, 2025, focusing on its key features, objectives, and practical implications. It then provides a comparative analysis with the existing Section 115BBF of the Income-tax Act, 1961, and Rule 5G of the Income-tax Rules, 1962, highlighting similarities, differences, and potential areas of concern or improvement. The commentary concludes with an assessment of the likely impact of the proposed changes and identifies areas where further legislative or judicial clarification may be warranted. Objective and Purpose The legislative intent behind both Clause 194 (S. No. 2) of the 2025 Bill and Section 115BBF of the 1961 Act is to provide a concessional tax regime for royalty income derived from patents that are both developed and registered in India by resident patentees. This regime, often referred to as a "patent box" regime in international tax parlance, is designed to encourage research and development (R&D) within the country, foster innovation, and incentivize the commercialization of intellectual property domestically. The policy rationale is twofold: * To reward and encourage Indian innovators and inventors by offering a lower tax rate on roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... key terms, many of which are directly borrowed from the Patents Act, 1970, or the existing Section 115BBF. Notably: * "Developed": At least 75% of the expenditure incurred in India by the eligible assessee for the relevant invention. * "Patentee": The true and first inventor whose name is entered in the patent register, including joint patentees. * "Royalty": Consideration for transfer or use of patent rights, excluding capital gains or sale proceeds of products manufactured using the patent. These definitions ensure that only genuine, substantial R&D activity conducted within India qualifies for the benefit, and that the concessional regime is not extended to mere holders of patents or to those whose connection to the invention is tenuous. Key Interpretative Elements * Eligible Assessee: The benefit is restricted to a person resident in India who is a patentee. This echoes the definition u/s 115BBF and ensures that the regime is not available to non-resident patentees, thereby targeting domestic innovation. * Qualifying Patent: The patent must be both developed (with at least 75% of expenditure incurred in India) and registered in India. This requirement is designed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal compliance burden. The lock-out provision further underscores the importance of consistency and accuracy in tax filings, as a single lapse can result in the loss of the benefit for a decade (five years of ineligibility after a lapse in any of five years). Administrative and Regulatory Impact Tax authorities will need robust systems to track the exercise of options, monitor compliance with the consistency requirement, and enforce the lock-out provision. The definitions provided should help minimize disputes over eligibility, but the potential for interpretative challenges remains, especially in relation to the "developed" criterion and the calculation of qualifying expenditure. Comparative Analysis with Section 115BBF and Rule 5G Section 115BBF of the Income-tax Act, 1961 Section 115BBF, introduced by the Finance Act, 2016 (effective AY 2017-18), was India's first foray into a patent box regime. Its key features are: * Scope: Applies to "eligible assessee" (resident patentee) earning royalty from a patent developed and registered in India. * Rate: 10% on qualifying royalty income. * No Deductions: No deduction for any expenditure or allowance in computing such inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 2) and the existing Section 115BBF regime. * Procedural Nuance: The Bill refers to the due date u/s 263(1) for exercising the option, whereas Section 115BBF refers to Section 139(1). This may reflect a restructuring or renumbering in the 2025 Bill, but the intent is to require timely exercise of the option concurrent with return filing. * Integration with Broader Special Tax Regimes: The 2025 Bill consolidates various special tax rates for different categories of income (lotteries, online games, carbon credits, virtual digital assets, etc.) into a single clause. This may improve clarity and administrative efficiency. * Potential for Updated Procedures: The Bill leaves the manner of exercising the option to be "prescribed," likely through future rules, which may update or replace Rule 5G and Form 3CFA. Ambiguities and Potential Issues While the regime is, on its face, straightforward, several interpretative and practical issues may arise: * Determining "Developed" Expenditure: The requirement that at least 75% of the expenditure for the invention be incurred in India may necessitate detailed tracking and documentation, particularly for multinational entities or collabor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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