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October 13, 2008
Draft National Innovation Act, 2008:
Government of India’s new initiative to boost innovation
“The problem is not how to innovate but
to know what to innovate.”- Albert Einstein
At a meeting of the Indo-US Task Force on Shaping the Global
Innovation Economy in September 2007, Union Minister For Science
& Technology And Earth Sciences, Mr. Kapil Sibal had announced
that FICCI (Federation of Indian Chambers of Commerce of India)
would soon draft for the Government, an India Innovation Act to
spur Innovation in India. The draft of the National
Innovation Act, 2008 (“Draft Act”)
that was to be modeled on the America COMPETES Act, 2007, is now
available on
http://dst.gov.in/draftInnovationlaw.pdf for public review.
The ethos of the Act reflects in its preamble: “An Act to
facilitate public, private or public- private partnership
initiatives for building an Innovation support system to
encourage Innovation, evolve a National Integrated Science and
Technology Plan and codify and consolidate the law of
confidentiality in aid of protecting Confidential Information,
trade secrets and Innovation.”
The highlights of the Draft Act:
The Draft Act has defined “Innovation” as a process for
incremental or significant technical advance or change,
providing enhancement of measurable economic value to include
(a) introducing new or improved goods or services (b)
implementing new or improved operational processes; and (c)
implementing new or improved organizational / managerial
processes.
The Draft Act further explains that: measurable value
enhancement or economic significance may include one or more of
the following:
(i) increase in market share;
(ii) competitive advantage;
(iii) improvement in the quality of products or services;
(iv) reduction of costs.
The Draft Act specifically excludes
“product/s” from this definition.
The Act introduces the concept of “Special
Innovation Zones” (“SIZs”) (on the lines of the
SEZ under the Special Economic Zones Act, 2005) and Innovation
Parks (“IPs”) that shall be notified by the
Ministry of Science and Technology (“Ministry”)
of the Government of India in order to cluster the enterprises
engaged in Innovation. The Government may set up a company or a
corporation or a body corporate as public or public- private
initiative for establishing Special Innovation Zones through a
special purpose vehicle.
The Draft Act is divided into 7 Chapters
and has a Schedule that lists the fiscal benefits to be granted
to SIZs and IPs. The Appropriate Government (State or Central
Government) will, on notification of this Act, bring about
appropriate changes in various other statutes to give effect to
this Act.
Chapter 3: National Annual
Integrated Science and Technology Plan
The Ministry shall present the National
Annual Integrated Science and Technology Plan (“Plan”) in
February every year. The Plan will include annual goals set for
encouraging Innovation in the country. The Plan is a holistic
approach to make India a world leader in science and technology.
It will highlight the policy initiatives and measures that need
to be taken to spur Innovation at all levels including the grass
root level. It shall take into account the resources needed to
boost basic research, revamping the course structure at
university level and providing better opportunities to talented
young minds. The plan also includes setting up state-of-art
research facilities and SIZs for scientists and researchers to
take research and Innovation to the next step of successful
commercialization. The Government also aims to consider
collaboration with other countries and have international
participation to aid in the overall development of science and
technology in India.
Chapter 4: Measures for
supporting Innovation
The Government shall take special measures
for supporting Innovation especially low cost technologies by
way of supporting public, private or public-private initiatives
to promote Innovation resulting in economic/low cost products &
services. The Act suggests amending the Finance Act provisions
of the Income Tax Act, 1961 or other cognate central tax laws,
to incorporate the following concessions for entities involved
in Innovation:
-
Waiver of R&D fees
-
Waiver of
stamp duty on conveyances of property for establishing R&D
facilities
-
Long term tax
benefits
-
Fiscal incentives
under Schedule I
-
Waiver of short and
long term capital gains
Considering the increased
involvement of Angel Investors in this plan, the Government
has proposed the following incentives for Angel Investors as
defined in Section 2(1) of the Draft Act:
-
Stamp duty waiver on issue of equity
capital (physical/ dematerialized form)
-
Stamp duty waiver on transfer of physical
shares
-
Fiscal incentives under Schedule I
-
Short term and long term capital gain
- Transfer of investments in
securities in unlisted enterprises engaged in
translating R&D to product in market.
- Investment in securities of unlisted
companies established in SIZ/ IP or clients of companies
in SIZ/ IP
- Investment in educational
institutes, engaged in sciences, finance, management,
law with the principal object of supporting Innovation
under SIZ/IPs.
Facilitating measures by the
Government include:
-
Regulation of zoning of premises in
SIZ/IPs
-
Providing assistance in registrations
for tax purposes or make such registrations not
mandatory
-
Providing facility (liaison offices
of existing Registries) for securing intellectual
property rights (IPRs) on Innovation generated at the
SIZ.
-
Providing tax exemptions and stamp
duty waivers on technology licensing, conveyances of
property
-
Assist in registration in order to
take benefits for expenditure on research, know-how,
acquisition of patents and copyrights and setting up of
science and technology based infrastructures.
The Act envisages benefits within
SIZs, as have been created for Special Economic Zones in the
Special Economic Zones (SEZ) Act, 2005.
Chapter 5:
Private and Public-Private Partnerships
The Government plans to facilitate the
establishment of an electronic exchange or a physical market
place for monetizing the results of Innovation, including
IPRs. The Government will also encourage Innovation by inter
alia providing funds at reduced interest rates to facilitate
Innovation in products and services in small and medium
enterprises (SMEs).
Chapter 6:
Confidentiality and Confidential Information
This Chapter is dedicated to an important aspect of
Innovation which no legislation in India has previously
addressed. It creates an obligation of confidentiality
irrespective of whether an agreement to the effect has been
entered into by the parties engaged in Innovation. (I.e. it
includes non-contractual relationships). Further, the
Appropriate Government shall notify the minimum terms &
conditions for confidentiality agreements for the purpose.
Similarly courts are also required to
preserve secrecy of subject matters under dispute in respect
of CI. Section 11 defines three acts that do not amount to
misappropriation of CI. The Chapter also discusses the
injunctive reliefs and damages available in case of
misappropriation of CI.
Section 12 provides for interim, ad
interim and final injunction to restrain actual, threatened
or apprehended misappropriation of CI. In a situation where
interim relief provided by court is later found to be
groundless, it also provides for compensation by complainant
to defendant. It further provides for roping in the
administrative machinery (like the police) to assist
enforcement of the court’s directions. The Appropriate
Government shall be entrusted with the duty of notification
of quantum of damages for complainant in case of
misappropriation of CI.
Chapter 7:
Rules and Regulations to be made by Appropriate Government
The Government shall lay down the rules
and regulations to carry out the provisions of the
Innovation Act in a way that is best suited to encourage
more initiatives towards making India an Innovation leader.
This would include rules that provide for minimum investment
terms and conditions for establishing Special Innovation
Zones by different entities and notifications to put the
confidentiality provisions in Chapter 6 into effect.
Schedule I:
It sets out the special fiscal benefits to be granted to
units set up in SIZs and IPs.
Part I lists the
Indirect Tax incentives that include exemption from: payment
of customs/ excise duties sourced by the units, payment of
Central Sales Tax, excise duty on prototypes manufactured,
service tax on services procured, R&D cess payable.
Part II lists the Direct
Tax incentives that inter alia are: tax holidays in
respect of profits, both from domestic and export revenues,
exemption from payment of: income tax on income of a Venture
Capital fund/ company investing in an unlisted company
engaged in Innovation, weighted deduction equivalent to one
and one-fourth times of any sum paid to a company engaged in
Innovation, tax gains in certain defined situations, capital
gains on transfer of assets while shifting a unit from urban
area to a SIZ, exemption of profits and gains by undertaking
engaged in SIZ.
India’s present commitment to
Innovation:
In January 2007, Government of India had
announced plans of doubling the R&D spending over the next
five years, from 1% to 2% of India’s GDP. Government funding
accounts for roughly 75% of India's R&D investments, and
rises to 85% when indirect Government funding is included.
The remainder comes from industry and foreign direct
investment (FDI). The need of the hour is adequate
investment in universities, better compensation and
incentives to faculty to commercialize their research,
world-class laboratory facilities and more encouragement for
students to enroll for doctorates.
On a similar note, the Council for
Scientific and Industrial Research (CSIR) is planning to set
up a separate company to monetize their existing patents.
CSIR, the single largest holder of patents in India has
patents with a potential commercial value of $1 billion. The
proposed holding company will commercialize the patents by
inter alia forming subsidiary joint ventures and
licensing intellectual property to professional firms.
India, the land of outsourcing, has been
known to “rent its IQ rather than creating IP1”.
The interest shown by the Government in encouraging
Innovation will go a long way in reversing this fact.
____________________
1 Opinion of Craig
Mundie, chief research and strategy officer at Microsoft
Sources:
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If you have
any feedback or comments on the Draft Act, please feel
free to mail us
aditin@nishithdesai.com
&
deepti@nishithdesai.com. We at Nishith Desai
Associates would be delighted to receive your responses
to the same and interact with you.
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