A White paper by Kiran Mazumdar Shaw on ‘Measuring Impact and Outcome of Tax SOPs Offered to Corporate Tax Payers’

1. 1
MEASURING IMPACT AND OUTCOME OF TAX SOPS
OFFERED TO CORPORATE TAX PAYERS
Kiran Mazumdar-Shaw
CMD, Biocon Limited

2. 2
PREAMBLE
Every ruling government has offered Tax incentives to Corporate Tax Payers in
order to boost investment and economic growth as well as augment private
sector contribution to social welfare needs.

3. 3
The following is a comprehensivetable that provides a break-up of various Tax
incentives under various sections of the IncomeTax Act:
TABLE1
Sl.
No. Nature Of Incentive
Revenue
Impact
(2013-14)
₹ : Cr
Revenue
Impact
(2014-15)
₹ : Cr
% Of Total
Incentive
1. Deduction of SEZ Export Profits (Section 10A &
10AA)
17,000 18,400 18.7
2. Accelerated Depreciation
(Section 32)
34,300 37,000 37.6
3. Weighted Tax deduction for R&D (Section
35(1),(2AA),(2AB)
7,500 8,100 8.2
4. Deduction of Profits Under Section 80-1A for
Development, Infrastructure IT & Power
15,000 16,200 16.5
5. Deduction of Profits from Production of
mineral oil & Natural Gas (Section 80-1B)
6,200 6,700 6.8
6. Deduction of Profits under Section 80-1C in
Uttaranchal & Himachal Pradesh, Sikkim etc.
7,000 7,500 7.6
7. Deduction under Section 80-1AB In
development of SEZs
1,400 1,500 1.5
8. Deduction under Section 80G & 80GGA &
80GGB, 35AC, 35AD Covering Donations &
Social Programs
1,750 1,900 1.9
9. Deductions under Section 80-1B J&K, Cold
Chain, Storage of fruit, Vegetables, grain etc.
800 850 0.9
10. Miscellaneous deduction sunder Section
80JJA, 80JJAA, 80LA, 801D
200 250 0.2
TOTAL 91,150 98,400
Deducting Nett MAT 33,350 36,000
FINAL TOTAL 57,800 62,400

4. 4
OBJECTIVES:
Each of the incentives categorized above, have been offered to Corporate Tax
Payers with desired objectives:
 INCENTIVES FOR SEZS: SECTION 10A, 10AA, 80-1AB
Special Economic Zones have been created to create new engines of
growth and to make India’s exports globally competitive through quality
infrastructure backed with attractive fiscal incentives and minimum
regulations.
The main objectives of the SEZ Act are:
(a) Generation of additional economic activity
(b) Promotion of exports of goods and services
(c) Creation of employment opportunities
(d) Development of infrastructurefacilities
The total outlay in 2014-15 of fiscal incentives being extended to investors in
SEZsis approximately ₹20,000 crores or US$3 Billion. These incentives have
been categorizedas follows:
 Duty free imports
 100% IncomeTax exemption on export income for first 5 years and 50%
for the next 5 years and 50% of the ploughed back export profit for an
additional 5 years.
 Exemption of MAT under section 115 JB
 Exemption of CST
 Exemption of Service Tax
 Exemption of State Sales Tax
 Exemption of Dividend Distribution Tax under section 115 O
In addition to the above, Developers of SEZs have been extended Tax
exemptions under section 80-1AB

5. 5
IMPACT& OUTCOME OF SEZ TAX INCENTIVES
As on date, the SEZ Policy has witnessed the establishment of 363 Special
Economic Zones across the country. These SEZs cover businesses in
IT/ITES, Biotechnology, Pharmaceuticals, Engineering, Automobiles,
Gems & jewelry, Aluminum products, leather products, Chemicals,
Textiles, Agro-processing, Power/Energyand Handicrafts.
The following Table 2 provides an overview on the outcome and impact
of the SEZ Policy:
TABLE 2: FACT SHEET ON SPECIAL ECONOMIC ZONES
Number of Formal Approvals 413
Number of notified SEZs 327
Operational SEZs 202
Units approved in SEZs 4,102
₹ : Cr
INVESTMENT Investment
(As on February, 2006)
Incremental
Investment
Total
Investment
Central Government SEZs 2,279.20 10,674.65 12,953.85
State/Pvt. SEZs set up before 2006 1,756.31 9,009.01 10,765.32
SEZs Notified under the Act - 3,25,264.05 3,25,264.05
Total 4,035.51 3,44,947.71 3,48,983.22
Persons
EMPLOYMENT Employment
(As on February, 2006)
Incremental
Employment
Total
Employment
Central Government SEZs 1,22,236 1,13,488 2,35,724
State/Pvt. SEZs set up before 2006 12,468 67,343 79,811
SEZs Notified under the Act 0 11,89,062 11,89,062
Total 1,34,704 13,69,893 15,04,597
₹ : Cr
Exports in 2013-14 4,94,077
Exports in 2014-15 4,63,770

6. 6
The total investments in SEZs as on date is approximately ₹ 350,000
crores (US$55 Billion), with exports amounting to ₹ 500,000
crores (US$75 Billion), collectively employing approximately 1.5
Million people.
The US$3 Billion being extended as Tax incentives has realized the
stated objectives of the SEZ Policy.
 INCENTIVES FOR R&D: WEIGHTED DEDUCTIONS UNDER
SECTION 35(1), (2A), (2AB):
Developed economies such as Europe and USA have identified key enabling
technologies for which funding has been significantly increased in the areas
of research, innovation and education:
 Information and Communication technologies
 Biotechnology
 Nanotechnologies
 Advanced Materials
 Advanced Manufacturing and processing
 Space

7. 7
India has also identified these sectors as thrust areas for research and
innovation. Investments have been optimal in some areas and sub-optimal
in others but nevertheless, success signals are now beginning to be
perceptible especially in Space, ICTand Biotechnology:
 India’sMangalyaan,Mission to Mars program has been celebrated the
world over as a success of frugal innovation led by advanced Science
and Technology.
 ICTwhich supportsIndia’sgloballysuccessfulSoftwareServicessector,
is now ready to enter the realm of next generation products.
 India’s Pharmaceuticalsector is catering to 30% of global generics and
is aptly refered to as ‘The pharmacy of the world’.
 India’s Biotechnology sector has reached critical mass in recombinant
technology based agriculturaland pharmaceutical products which has
seen India become the world’s largest Vaccine producer, a global
Insulin producer and the world’s largest supplier of Bt Cotton.
Biomedical devices, Genomics and 3D printing offer the next spate of
opportunities.
The following is a comparative table of Tax SOPs of BRIC countries who are
all vying for FDI and Venture Capital across its businesses:
TABLE3: COMPARING R&D SOPs of BRIC ECONOMIES
BRAZIL RUSSIA INDIA CHINA
Corporate Tax Rate 34% 20% 30% 25%
Super Deduction
160% of All
R&D
150% of Eligible
R&D
200% of In-
house R&D
150% of
Qualifying
R&D
Special Economic
Zones
--- 10 Year Tax
Holiday
5 Year Tax
Holiday
5 Year Tax
Holiday
Miscellaneous
20% super
Deduction for
patents
15% Corp tax
for High/New
Technology
First RMB 5 M
at 50% VAT
Eligible Sectors S&T S&T S&T S&T
As can be seen fromabove, India’s R&D SOPsare comparableto those of China,
Brazil & Russia and enables us to compete on a level playing field. However,
when viewed in context of CorporateTax Rates, China and Russia scorebetter.

8. 8
PATENTBOX REGIME
The term ‘Patent Box’ refers to a lower tax rate applicable to a separate box of
income derived from Intellectual Property or patents. Several European
countries as well as UK have adopted this Tax regime to foster research led
business activity necessary to build global leadership in innovation. Under such
a scheme, Corporate Tax rate is lowered significantly to between 5-15%
applicable to various forms of Intellectual Property.
The following table compares the Patent Box Regimes in several EU countries:
TABLE4: COMPARISON OF EUPATENTBOX REGIMES
TAX FACTOR Netherlands Spain U.K. France
Income
Qualified*
Netincome from
qualifiedIP
Gross patent
income
Net income
from qualifying
IP
Royalties, net of
cost of
managing
qualified IP
Acquired IP? Yes, if IP is
further self-
developed
No Yes, if further
developed and
managed
Yes, subject to
conditions
Cap on
benefit?
No Yes, 6 times
cost incurred to
develop IP
No No
Includes gain
on sale of
qualified IP?
Yes No Yes Yes
Can R&D be
performed
abroad?
Yes Yes but must be
part of
licensor’s IP
Yes Yes
Year enacted 2007, 2010 2008 2013 2001, 2005,
2010
Applicable to
existing IP?
Only applicable
to IP granted
after 2006
Yes Yes Yes
Credit for tax
withheld on
royalty?
Yes Yes Yes Yes
Nominal
Tax Rate
5% 15% 10% 15%

9. 9
* QualifiedIP includes patents, patentable inventions and improvements made
to them. It also includes industrial manufacturing processes that are the
continuation of patents or patentable inventions. IP rights must also qualify as
assets. If IP rights are acquired (that is, do not result from R&D activities
performed by the company), they must be held for at least two years to qualify
for the patent box regime.
INDIA INC’s R&D SUCCESS:
Thanks to R&D incentives, India is today:
 The Pharmacy of the world where Indian generics account for 30% of
global generics which has made a huge impact on Global Healthcare.
 India is the largest Vaccine producer where one in three children globally
are vaccinated by a ‘Made in India’ vaccine. WHO is one of the largest
procurers of Indian vaccines.
 India is one of the large producers of Recombinant Human Insulin which
has lowered the cost of Insulin dependentdiabetes across theglobe.
 India’s innovation potential has been recognized by MNCs who have
established their R&D centers in India. Eg. GE, Mercedez Benz, Bristol
Myers Squibb, Abbott, Sanofi etc.
India’s growing stature as an innovation led economy is seeing reversal of the
scientific brain drain that was apparent in the 1960s – 1980s. Today India Inc.
invests on an average10% of their sales in R&D.
As can be seen from TABLE 1, the total R&D Incentives under Section 35(1),
(2AA), (2AB) amounting to Rs:8100 crore in 2014-15, represents only 8.2% of
total tax incentives offered to CorporateTax Payers.
The outcome of this speaks volumes for the impact R&D incentives have made
on India’s Pharma Sector:
₹ : Cr
INVESTMENT Investment
(As on Apr 1, 2015)
Pharma Sector 174,000
SEZ Pharma/Biopharma 35,000
Biopharma 6,000
Total 215,000

10. 10
EMPLOYMENT Employment
(As on Apr 1, 2015)
Pharma 1,500,000
Pharma/Biopharma SEZs 150,500
Ancillary Industry (Pharmacies, C&F) 8,,500,000
Total 10,150,500
Exportsin 2013-14: US$ 14.6 Billion
Exportsin 2014-15: US$ 15 Billion
The total investments in India’s Pharma and Biotech industry (including sector-
specific SEZs) as on date is approximately ₹ 215,000 crores (US$36 Billion),with
exports amounting to ₹ 94,000 crores (US$15 Billion), collectively employing
approximately 10 Million people.
India’s Pharma Exports to Top 5 Destinations
Rank Country 2014-15 Exports
(US$ million)
Contribution
(%)
1. US 4,500 28%
2. UK 540 4%
3. South Africa 500 3%
4. Russia 450 3%
5. Nigeria 400 3%

11. 11
India in the Global Arena
Authority Numbers
USA
DMFs filed with USFDA
(companies) (As on 31st
March 2015)
238
No: of Sites(Bulk drugs +
Formulations) Registered with
US FDA (as on 15th April 2015
)
605
Total No Of DMF’s (Type II
Active) Filed from India (as on
31st March 2015)
2911
ANDAs(As on 15th April 2015 ) 3070
Formulation companies with
USFDA approvals.
43
Europe
Number of CEPs received (as
of 18th April 2015)
1187
No. of companies with CEPs 160
Number of Molecules for
which CEPs have been filed
with EDQM
371
No of Sites registered with
EDQM In India (As on 15th
April 2015)
553
UK MHRA (Medicines
Healthcare Regulatory
Agency), Market
authorizations as on May 2014
1275
No. of CEPs with Irish
Medicines Board
300
No. of companies registered in
Irish Medicines Board
19
No. of Authorisations with
Sweden MPA
(Läkemedelsverket)
209
No. of companies having MA`s
with Sweden MPA 14
(Läkemedelsverket)
14
WHO GMP WHO GMP Certified Plant (as
per Drug Controller General of
India)
1400 (as per Drug
Controller General of
India) (approx.)
Source:Pharmexil AnnualReport2014-15

12. 12
Combined Market Cap of Companies on S&P BSE Healthcare Index: ₹: 795,500
cr or ~ US$135 billion.
Pharma Industry is the Sixth Largest Recipient of FDI between 2000
and 2015
STATEMENT ON SECTOR-WISEFDI EQUITY INFLOWS(FromApril 2000 to June 15)
S.No. Sector Amount of
FDI Inflows
% of Total
Inflows
(₹ : Cr) (US$bn)
1. SERVICES SECTOR 209,600 43,350 16.8
2. CONSTRUCTION DEVELOPMENT:
Townships, housing, built-up
infrastructure and construction-
development projects
113,355 24,100 9.5
3. COMPUTER SOFTWARE &
HARDWARE
89,500 17,500 6.8
4. TELECOMMUNICATIONS 86,600 17,450 6.8
5. AUTOMOBILE INDUSTRY 70,900 13,500 5.2
6. DRUGS & PHARMACEUTICALS 66,650 13,350 5.1
Source: DIPP

13. 13
THE CASE FOR PHASING OUT ACCELERATED DEPRECIATION UNDER
SECTION 32:
Accelerated Depreciation is a policy announced by the governmentin the 1990s
to promote large ticket investments in specific industry sectors. Accelerated
Depreciation wasseen as an incentive to reduce taxable incomespecifically with
the objectiveof reinvestment. However,therehasbeen a misuseof thebenefits
of the Accelerated Depreciation policy which is evidenced by over-capitalization
and an idle capacity of 60% in India.
Renewable Energy: Misusedaccelerateddepreciation, missedopportunities
Renewable Energy is one such sector that was extended Accelerated
Depreciation benefits since 2002. Under the policy, companies generating
renewableenergy suchas solarand windcould avail of accelerated depreciation
@ 80% of their capital assets in the firstyear.
However, data reveals that there was a high level of fraud whereinvestments in
wind energy remained on paper and companies and individuals got extensive
depreciation benefits. Consequently, Accelerated Depreciation was withdrawn
for wind energy in 2012, butretained for solar power projects.
InJuly 2014,theIndiangovernmentannounced plans to restoretheAccelerated
Depreciation program for wind energy.
Total
Estimated
Renewable
Energy
Capacity (as
of March
31, 2013) =
26,000 MW
Source
Renewable
Energy
Capacity
Installed
(MW)
Total
Investment
Equity
(30%)
Debt
(70%)
Tax (₹ : Cr)
foregone
through
Accelerated
Depreciation
Biomass 4,500 27,000 8100 18,900 21,600
Wind 20,160 131,040 39,300 91,700 104,800
Solar PV
(ground)
1,300 13,000 3,900 9,100 10,400
Solar PV
(rooftop)
40 640 192 450 500
Total 26,000 171,680 51,500 120,150 137,300

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In hindsight, if the forgone tax collections (₹ : Cr 137,300) had been instead
utilized asequity financing forestablishingnew RenewableEnergyplants, the
governmentcould not only have retained the land and property in its name,
but it would have generated greater employment as well.
CASE STUDY: AcceleratedDepreciation Fails To Raise Capacity UtilizationIn
Wind Power Sector inIndia
In the 10th and 11th Five Year Plan,Wind Powerinvestorswere allowedtoavail 80% Accelerated
Depreciation. This effectively allowed investors to recover their equity in the first year itself by
writing off taxes. Though this policy boosted investments in the wind power sector, it also led to
poor capacity utilization for wind turbines (See Table: THE INDIAN WIND POWER SECTOR'S
CAPACITY UTILIZATION FACTOR). This was because the incentives were for intended for installing
wind power and not generating wind energy. Investors were more interested in tax benefits
throughAccelerated Depreciation andnotinearningmoneybysellingpower.
The Accelerated Depreciation benefitswere availed only by those companies that were making
profits - eitherontheirown or throughtheirsisterconcerns.Independentpowerproducers(IPPs)
were notable to avail ADbenefits;itwasalsoof little use indrawingFDI.
Table: THE INDIANWIND POWERSECTOR'S CAPACITYUTILIZATIONFACTOR
Year Up to 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
InstalledCapacity (MW)
Cumulative
5350.77 7092.82 8756.14 10241.04 11805.64 14154.84
InstalledCapacity (MW) Year
wise
1742.05 1663.32 1484.9 1564.6 2349.2 3196.7
Power Generated(BU) 9.547 11.413 13.334 18.188 18.735 23.353
Methodology1 CUF (%) 20.4% 18.4% 17.4% 20.3% 18.1% 18.8%
AvgCUF 18.9%
Methodology2 CUF (%) 18.6% 17.2% 16.5% 19.4% 17.1% 17.6%
AvgCUF 17.7%
Methodology3 CUF (%) 17.7% 16.6% 16.1% 18.9% 16.6% 17.15
AvgCUF 17.2%
Source: Data from MNRE. Analysis by CSE
Using three different methodologies, it was observed that the average capacity
utilization factor (CUF) of the Indian Wind Power sector in the years 2006-07 to
2011-12 varied between 17% and 19%, which is low as compared to other

15. 15
countries. (Source: ‘State of Renewable Energy in India – A Citizen’s Report’ by
Centre for Science & Environment)
Conclusion: If the Government wants to phase out tax exemptions, I do believe
that Accelerated Depreciation under Section 32 is a low hanging fruit as it
accounts for 37.6% of the total tax incentives. Moreover, Accelerated
Depreciation, which is linked to the amount invested, favours capital-intensive
industries over labour-intensive ones. Such a policy is therefore highly
unsuitable in a country like India, which needs to create 10 million jobs per year
for the next 10 years to sustain an acceptable Gross Domestic Product (GDP)
growth. Phasing out Accelerated Depreciation would, in effect, lead to better
capital efficiency and will also deter over capitalisation of largeprojects which is
often the caseas data reveals.
THE ISSUE WITH TAX HOLIDAYS UNDER SECTIONS 80IA, 80IB, 80IC
Taxholidayshavebeen in voguein the Indianincometax regime fora long while.
Section 15C of the Indian Income-tax Act, 1922 introduced in 1949-50 (on the
eve of the First Five Year Plan) provided exemption of tax on profits to new
industrial undertakings in priority sectors, hotels and all Small Scale Industries
(SSI) in specified backward areas subject to certain limits. These exemption-
rated holidays were incorporated in the Income-tax Act 1961 through sections
80I and80J untilthey werereplaced by new sections. Provisionsthathavecome
in their place (for example, sections 80IA, 80IB and 80IC) allow deduction or
exemption of tax on income from new industrial undertakings (or their
extensions) set up in specified sectors and/or areas subject to certain limits and
conditions.
Section80IA allows deduction of profits and gains fromindustrial undertakings
or enterprises engaged in the development of infrastructure. This section was
first introduced in the IT Act in 1991 and was amended almost every year
thereafter until it was substituted by sections 80IA and 80IB in 1999. Section
80IA,asitstandsnow,holds outpromisesof taxholidays to enterprisesengaged
in the development or maintenance/operation of infrastructure facilities
specified in the Act, providing telecommunication service, developing and/or
operating an industrial park or SEZ; in the generation and/or distribution of
power or renovating or modernising distribution lines.
Section80IB allows an income tax holiday to industrial undertakings other than
those covered under section 80IA, like mineral oil & natural gas.

16. 16
Section80ICprovidesan income tax holiday specifically forcertain undertakings
or enterprises set up in special category states like N-E states, Sikkim, Himachal
Pradesh and Uttaranchal.
The rationale for tax holiday to new industrial undertakings in developing
countries is simple viz., that new ventures in areas such as infrastructure
development, new sectors/activities are risky, and therefore to be incentivized
through Tax Holidays that are seen as the government sharing the risks.
However, the efficacy of tax holidays to achieve this is highly questionable.
Problems withsuchtax holidays:
 Tax holidays are extremely difficult to administer because of the
opportunities they open up for ‘transfer pricing’ by shifting income to
related ‘holiday’ firms (whereit will not be taxed) and shifting deductions
to non-exempt firms.
 It attracts fly-by-nightoperators that shut shop and relocate to the next
area with such benefits.
 Region-specific tax holidays are detrimental to economic efficiency, as
they create an artificial competitive advantage to businesses leading to
idle capacity and sick industries when such tax incentives are withdrawn.
Eg. Pharma units in Baddi, Himachal Pradesh
An impact evaluation study of the North-East Industrial Policy, 1997 which
envisaged tax holidays to industries set up in the N-E states, concluded:
o No large-scale investment has taken place as a result of the policy: Small
and medium enterprises dominate the scenario, with low investment,
low value add, and low employment.
o Several excise intensive units reflect only the final stage of
manufacturing activity, entailing relatively low investment and
employment, and figure among the major excise beneficiaries.
o Developed states within the region continue to attract most of the
investment: Assam and Meghalaya account for 91 percent of the
investment.
o Better connectivity with the mainland, quality of infrastructure and
logistics, security concerns are identified as the driving force for the
observed pattern of location of investment.

17. 17
o With the tax holidays extended to Uttaranchal and Himachal Pradesh,
most of the investments will flow to them, as they are strategically better
placed to attract investors, with closer connectivity to the major markets
and therefore having a competitive edge in attracting investment.
The study recommended that creation of better infrastructure,better transport
facilities and interest subsidy would spur investmentin the N-E states.
CONCLUSION:
If the Government is keen to phase out a plethora of tax exemptions extended
to Corporate Tax payers in India, for the reasons discussed above, it would be
prudentto examine the relevance of Accelerated Depreciation under Section 32
especially for Renewable Power Projects. This should either be phased out or
the rate of depreciation lowered. Another set of Tax exemptions under sections
80IA, 80IB, 80IC may also beexamined for their impact on achieving investment
and employment generation in backward areas. Perhaps, a tax subsidy on the
final product may be a preferred option. On the other hand, tax exemptions
pertaining to SEZs and R&D have delivered on their stated objectives and must
be further augmented to drive investment, growth and employment. It is
further recommended that India adopt a Patent Box Regime as described in
Table 4 to foster innovation and create high value whilst harnessing scientific
and engineering jobs.
A recent report from consulting firm Zinnov has stated that India is the No. 1
choice for global Technology led R&D. 69% of all new offshore R&D Centers
established in 2015werein India.Furthermore,Indiaaccounted for$12.3billion
or 40% of globalized Engineering and R&D investments in 2015 compared to
China’s $9.7 billion. This is a formidableposition which mustbe augmented and
not weakened by any policy change. Any measures to remove R&D incentives
will see a resurgence of the proverbial ‘brain drain’ which will be highly
detrimental to India’s future.