Tax Incentives for Scientific Research: Clause 45 of the Income Tax Bill, 2025 vs. Section 35

Clause 45 Expenditure on scientific research.

Income Tax Bill, 2025

Article on Clause 45 of the Income Tax Bill, 2025

Introduction

Clause 45 of the Income Tax Bill, 2025, introduces a framework for deductions related to expenditures on scientific research. This provision aims to encourage businesses to invest in research and development (R&D) by offering tax incentives. The clause is significant as it aligns with the government's broader agenda to promote innovation and technological advancement within the country. This article provides a comprehensive analysis of Clause 45, comparing it with the existing Section 35 of the Income Tax Act, 1961, to highlight the changes and implications for taxpayers.

Objective and Purpose

The legislative intent behind Clause 45 is to stimulate economic growth through innovation by providing tax deductions for expenditures on scientific research. By offering these incentives, the government seeks to reduce the financial burden on businesses engaging in R&D activities. Historically, similar provisions have been part of tax legislation to support industries in enhancing their technological capabilities and competitiveness.

Detailed Analysis

Sub-section (1): Types of Expenditure

Clause 45(1) allows deductions for capital and revenue expenditures incurred on scientific research related to the business of the assessee. However, it specifically excludes expenditures on land acquisition. This exclusion is consistent with past legislative practices to prevent the misuse of deductions for non-research-related asset acquisitions.

Sub-section (2): Pre-commencement Expenditure

Clause 45(2) permits deductions for expenditures incurred up to three years before the commencement of business, provided they are certified by the prescribed authority. This provision is designed to support startups and new ventures that invest in R&D before generating revenue.

Sub-section (3): Payments to Research Entities

Deductions are also available for payments made to research associations, universities, and approved companies for scientific research. This encourages collaboration between businesses and research institutions, fostering an ecosystem of innovation.

Sub-section (4) and (5): Conditions and Continuity of Deduction

Deductions are contingent upon compliance with prescribed conditions and documentation. Clause 45(5) ensures that deductions are not denied if approvals for research entities are withdrawn after the payment is made, providing certainty to taxpayers.

Sub-section (6) to (11): Miscellaneous Provisions

These sub-sections address technical aspects such as the non-availability of deductions under other sections for the same expenditure, applicability of depreciation provisions, and the treatment of assets transferred during amalgamations.

Practical Implications

Clause 45 impacts various stakeholders, including businesses, research institutions, and tax authorities. Businesses need to maintain meticulous records to claim deductions, while research institutions benefit from increased funding opportunities. Tax authorities must ensure compliance with the prescribed conditions to prevent abuse of the provision.

Comparative Analysis with Section 35 of the Income Tax Act, 1961

Overview of Section 35

Section 35 of the Income Tax Act, 1961, similarly provides deductions for scientific research expenditures. However, it includes specific multipliers for deductions based on the type of research entity and the nature of the expenditure.

Key Differences

• Multipliers: Section 35 offers enhanced deductions (e.g., 1.5 times the expenditure) for payments to certain research entities, while Clause 45 does not specify such multipliers.
• Scope of Entities: Both provisions cover payments to research associations, universities, and approved companies, but Clause 45 provides a more streamlined approach without specifying different treatment for various entities.
• Pre-commencement Expenditure: Both provisions allow deductions for pre-commencement expenditures, but Clause 45 provides a more detailed framework for certification and deemed expenditure.
• Amalgamation Provisions: Clause 45 includes specific provisions for the treatment of assets transferred during amalgamations, which are more detailed than those in Section 35.

Conclusion

Clause 45 of the Income Tax Bill, 2025, represents a modernized approach to incentivizing scientific research expenditures. While it retains the core principles of Section 35, it simplifies certain aspects and provides greater clarity on the treatment of expenditures. As businesses navigate these provisions, they must ensure compliance with the prescribed conditions to maximize their tax benefits. Future reforms may focus on further aligning these provisions with international best practices and addressing any emerging challenges in the implementation.

Full Text:

Clause 45 Expenditure on scientific research.

Dated: 6-3-2025