Tax refunds for R&D investments in Budget

– No strings attached, unlike previous proposals

Private sector guarantees investments if approved

By Charindra Chandrasena

The Government will propose tax concessions through the upcoming budget for companies which invest in Research and Development (R&D), in an effort to stimulate private sector investments in this area.
Minister of Science, Technology, and Research Sujeewa Senasinghe said his Ministry had proposed this to the Finance Ministry, which is preparing the Budget.
“We have proposed to give concessions to the companies which would invest in innovation to get them a tax refund at least,” he said, addressing an event last week.
Following a meeting with industry stakeholders, the Ministry of Science, Technology, and Research had sent the budget proposal to the Ministry of Finance and Mass Media on Thursday (28) and is awaiting approval from Finance Minister Mangala Samaraweera and Prime Minister Ranil Wickremesinghe.
If this proposal is passed in Parliament, a high percentage of the earnings received through investments made in R&D will be exempt from taxes. The exact percentage will be decided in consultation with the Department of Inland Revenue (IRD), which is likely to establish a system whereby a range of concessions will be divided based on the investments.
If passed, the system is expected to come into effect within this year.
Since the moment of implementation of the system, the Ministry of Science, Technology, and Research would continuously monitor its proper implementation while the Ministry of Finance would overlook the tax concessions.
A similar tax refund scheme was included in the Budget 2012.
In successive budgets this decade, proposals have been brought to offer major tax concessions to companies investing in R&D. However, these were never successfully implemented for various reasons, including the condition that the companies had to carry out R&D through state-owned research institutes, which deterred prospective investors.
Crucially, in the new proposal, the R&D sector investment concessions would not include this condition, providing investors the option of making R&D investments in whichever industry and most importantly, giving them the freedom to utilise any research institute of their choice.
Sri Lanka’s spending on R&D equalled 0.16% of GDP in 2010 and 0.2% of GDP in 2013, in comparison to a world average of 1.7%; it was low even compared with its South Asian neighbours. India’s percentage was 0.81% in 2011, Pakistan’s was 0.33% in 2011, and Nepal’s was 0.30% in 2010.
Similarly, Sri Lanka’s percentage of high-tech products in total manufactured exports was 0.9% in 2012, far below the 6.2% average for South Asia, 8.4% for lower-middle-income economies, and 20.6% for upper-middle-income countries.
Under the Budget 2019, the Ministry of Science, Technology, and Research has been allocated with a total of Rs. 5 billion with Rs. 2 billion for recurrent expenditure and Rs. 3 billion for capital expenditure. This is similar to the allocation made for this Ministry under the Budget 2018.

Photo Indika Handuwala