The Goods and Services Tax (GST), introduced in India in 2017, unified multiple indirect taxes into a single, coherent system. However, its implications vary across sectors — and Research & Development (R&D) is one such field where applicability and compliance require special attention.
Whether R&D services are delivered in-house, outsourced, or exported, understanding how GST applies, the tax rates, and compliance obligations is essential for ensuring accuracy and availing potential tax benefits.
R&D refers to activities that involve investigation, experimentation, or innovation aimed at developing new products, processes, or services. Under GST, R&D services fall under the broader classification of:
📂 SAC Code 9983 – Other professional, technical and business services, which includes:
Scientific and technical research services
Industrial and manufacturing research
Software development and testing
Biotechnology or pharmaceutical R&D
Prototype design and feasibility studies
These services may be rendered in various sectors such as pharmaceuticals, IT, automotive, aerospace, academia, or public research bodies.
Any R&D service provided by a business entity to another within India is considered a taxable supply of service under GST.
🧾 Tax Rate:
✅ 18% GST (9% CGST + 9% SGST) or 18% IGST for inter-state transactions
🧮 Input Tax Credit (ITC):
Available on goods and services used to carry out R&D activities, such as lab equipment, software, consultancy, etc., provided the final output is taxable.
📌 Example:
A biotech firm in Hyderabad provides contract research services to a pharma company in Mumbai. Since it's an inter-state service, IGST at 18% applies.
If R&D services are provided to a foreign entity and payment is received in convertible foreign exchange, it qualifies as an export of service, which is considered a zero-rated supply under GST.
🌍 Tax Rate:
✅ 0% GST
🚀 Benefits:
Can export without paying GST by furnishing a Letter of Undertaking (LUT)
Alternatively, pay IGST and claim refund through GST portal
📌 Conditions for Export:
Supplier of service is located in India
Recipient is located outside India
Place of supply is outside India
Payment is received in convertible foreign exchange
Supplier and recipient are not merely establishments of the same person
📄 Example:
An Indian AI startup provides R&D consulting to a UK-based firm and receives payment in GBP. This qualifies as export of services and can be zero-rated with LUT.
Services rendered to central or state government departments may attract GST unless specifically exempted by notification.
📎 General Rule:
Most technical and professional services provided to government bodies are taxable at 18%.
⚠️ Exception:
If R&D is part of a project notified under exemption (such as projects under specific government research schemes), exemption from GST may apply.
📌 Recommendation:
Carefully check government circulars and project documentation to confirm exemption eligibility.
Special Economic Zones offer tax incentives for exports, including R&D services.
✅ When R&D services are provided TO an SEZ:
They are treated as zero-rated supplies, subject to specific conditions and documentation (such as endorsement from the SEZ authority).
✅ When R&D services are received FROM an SEZ:
These are generally treated as inter-state supplies, and GST applies depending on the nature of the service.
📝 Documentation Required:
SEZ unit endorsement
LUT if applicable
Contract/invoice showing place of supply and classification
In certain cases, R&D entities in India procure technical or scientific consultancy from foreign vendors (e.g., patents, reports, outsourced lab analysis).
In such cases, the import of service attracts GST under reverse charge.
💼 Under RCM:
Recipient (Indian entity) pays IGST at 18%
Eligible to claim ITC on same, if service is used for taxable output
🧾 Invoicing:
Include SAC code (usually 9983), proper HSN/SAC description, and place of supply
📌 Maintain LUTs:
For exporters, update and renew your LUT annually
💳 Track Foreign Exchange:
Keep FIRC and contract copies for zero-rated supply documentation
📤 Timely Filing:
File GST returns (GSTR-1 and GSTR-3B) with accurate outward supply data
🗂️ Refund Claims:
Track and apply for GST refunds on exports or input credits within the prescribed timelines
In the fast-evolving landscape of innovation, GST compliance for R&D services is not just a regulatory requirement — it's a strategic tool. Proper classification, claiming eligible input credits, and leveraging zero-rated benefits on exports can result in significant tax savings and improved operational efficiency.
Organizations engaged in R&D, whether in life sciences, IT, or industrial technology, should proactively work with tax consultants to ensure full compliance and capitalize on available benefits under the GST framework.