2010-03-12

The Intellectual property (IP) of a business includes patents, trade marks, designs, copyrights and the goodwill of the business. It is a component of the intangible assets of capital value. Maximisation of IP is not only fundamental for a business, but also requires an efficient IP strategy which takes care of the taxation and commercialisation objectives of the company. While taxation regimes like Income Tax, Capital Gains, Corporation Tax, Value Added Tax and Stamp Duty are applicable to IP, Custom Duties is also relevant while trading with foreign companies. Individuals owning IP can also be subjected to Inheritance Taxes.

 In India, the progressive rate of Income Tax varies from 0- 30%. Acquiring, developing and commercializing intellectual property contains tax liabilities at various stages. Gains from securities, mergers and acquisitions, create additional tax liabilities.

As per Income Tax Act, section 2 (14), capital gain is a tax charged on capital assets. Capital assets consist of any property held by an assessee, whether related to business or not, which is used to make money. Thus capital gain is applicable to IP, as well. The application can occur either through a Long Term Capital Gain @ 20% or a Short Term Capital Gain at normal tax rates. It can be exempted only on investments in bonds like National Highways Authority of India (NHAI)  or Rural Electrification Corporation Limited (RECL).

The Corporate tax, imposed on the profits made by a resident company, is 33.66% (basic of 30% with a 10% surcharge and 2% education cess). However foreign companies are taxed at 41.82% (basic of 40% with 2.5% surcharge and 2% education cess). A new tax on higher education has been imposed @1%.

The Value Added Tax (VAT), which is imposed on the value added of most goods and services, is collected at every stage of production and distribution. In India, VAT, the rate of which varies from 16-25%, is applied jointly with the Central Sales Tax (CST). Moreover, service tax at the rate of 12 %( 12.24% including the education cess) is levied on different services. Besides these, there is also a three-tiered excise duty structure of 8%, 16% and 24%.

Stamp duty is a form of tax charged for documents which transfer certain rights, to make them legally effective. With respect to IP, these rights include the ownership of and exclusive right to such properties. Deductions related to IP include deductions in respect of royalty income of authors under section 80QQB and of inventors under section 80RRB. However there are more general instructions applicable on income.

Proper consideration of the form of IP in a multinational business helps to detect all the taxation issues. Dealing effectively with the situations of taxation of IP emphasises on the importance of management. Pricing of international IP transactions is the center of attention of many tax authorities in transfer pricing investigations, especially where complex supply chains are involved. Thus devising appropriate methods to identify the values of IP in particular situations is vital for all taxation issues related to IP.