The Removal of Research and Development Cess Under GST: An Overview

This article delves into the details surrounding the Research and Development (R&D) Cess and its abolition within the Goods and Services Tax (GST) framework.

Why Research and Development Cess Was Implemented

The Research and Development Cess was initially introduced to foster the commercial utilization of domestically developed technology and to regulate the import of technology into India. This measure aimed to support technology-driven businesses and associated small and medium-sized enterprises in maintaining competitiveness in the global market, addressing the growing demand for technology imports and the need for its domestic development and maintenance.

The Previous Regulatory Framework

Established in 1986, the R&D Cess was applied to all payments made for importing technology into India. The term "import" specifically referred to bringing technology from outside India, while "technology" encompassed any specialized or technical expertise, services, designs, drawings, publications, and technical personnel required by an industrial entity under foreign collaboration. This cess was levied at a 5% rate on all such payments. Failure to pay the cess by the due date resulted in arrears and a penalty of up to ten times the outstanding amount.

Rationale for the Amendment

Under the Reverse Charge Mechanism, Indian companies importing technology were subject to Service Tax. To mitigate the impact of a dual taxation system, where both Service Tax and R&D Cess were imposed on technology imports, Notification No. 14/2012 – Service Tax was issued. This notification exempted the taxable service of technology import from Service Tax, equivalent to the R&D Cess payable, provided that:

• The R&D Cess was paid within six months from the invoice date, or, for associated enterprises, from the date of credit in the books of account;
• The exemption was contingent on the R&D Cess being paid at or before the payment for the service challan.

While this exemption offered some relief to technology importers, it did not fully resolve the issue of blocked working capital.

The Necessity for Abolishing the Research and Development Cess

The continuation of the R&D Cess placed an undue tax burden on importers, discouraging the adoption of modern technology vital for operations in India. This posed a conflict with the government's "Make in India" initiative, which sought to attract foreign companies to establish industries within the country. Furthermore, the abolition of the R&D Cess was not expected to significantly impact the Central Government's revenue, as Service Tax would still be collected at the full rate on payments previously subject to the cess. Conversely, its repeal would lead to cost savings in government collection efforts.

Abolition of Research and Development Cess Under GST

The proposed Model GST Law included the elimination of the Research and Development Cess. This change provides substantial relief to industrial entities involved in importing technology, including designs, drawings, publications, know-how, royalties, and technical personnel. The removal of the R&D Cess under GST is anticipated to reduce tax-related costs and simplify compliance procedures.

Conclusion

The discontinuation of the Research and Development Cess under GST is a significant positive development, particularly benefiting major sectors such as pharmaceuticals, automobile manufacturing, and information technology. This measure is expected to trigger a beneficial ripple effect, potentially leading to lower prices for final consumer products like medications, vehicles, and various technology-driven manufactured goods.