Mumbai, November 23, 2017

Research and development centres in India, mainly of pharmaceutical, biotech and manufacturing companies, have moved court saying the government has reneged on a tax sop promise by removing exemption on locally sourced raw materials under GST.

To encourage R&D companies to set up units in India, the government had exempted procurement of raw materials — whether imported or sourced domestically — from taxation for three years under the earlier tax regime. In a writ petition filed in the Delhi High Court on Monday, these R&D centres have pointed out that while tax exemption on imported raw materials continues under goods and services and tax (GST), it has been withdrawn for raw materials sourced locally.

This comes even as the government last week slashed the GST rate on domestically-procured raw materials from 18% to 5%. “R&D centres that wanted to set up operations in India were given a three-year exemption under the earlier tax regime, and to withdraw that under GST upsets operational capabilities of these companies,” said Abhishek A Rastogi, partner, Khaitan & Co. “While the government has reduced the GST rates on domestic procurement from 18% to 5% now, the test of constitutional validity still needs to be validated.”

Industry trackers said the exemption was aligned with the government’s aim to position India as one of the major centres in the global R&D space. “The exemption for indigenous procurements for the promised period will boost confidence of the domestic R&D units and make the Indian operations competitive,” Rastogi said.

“Businesses were set up based on earlier regulation, and now we trust and hope that the issue will be resolved soon by the courts,” said Aditya Mody, director of Devashish Polymers, which has an R&D unit. Mody is also a petitioner in the petition. Some tax experts, however, point out that the way GST works, outright exemptions may not go a long way as they could lead to tax leakage.

“In the past, end-user-based exemptions have seen some misuse, hence the tax authorities will be extremely cautious about granting end-user-based exemptions and will prefer that the value chain is not broken at any stage,” said MS Mani, partner, Deloitte India.

There could be another way by which R&D centres or other end-user-based exemptions could be incentivised, some tax experts said.

[The Economic Times]