A vast majority of studies assessing the impact of R&D tax incentives provided across the world conclude that such tax incentives spur investments. However, in India only a limited number of fi rms, especially small and medium ones, have actually been taking advantage of the state’s fi scal generosity.
Since 2019–20, the union government provides a weighted tax deduction of 200% for any capital and revenue expenditure incurred on in-house research and development (R&D) by a company. In that year India joined a growing number of countries in offering what is referred to as “super deductions”1 for encouraging additional investments in R&D by firms. In fact Mani (2014) had shown that India had the distinction of having the most generous tax regime for R&D investments.
This was not to last long as the Union Budget for 2016–17 reduced the tax incentives for performing R&D in business enterprises from the current 200% to 150% in the period 2017–18 onwards including 2019–20. From 2020–21, the tax incentive will be further reduced to just 100% of R&D. Simultaneously, the finance minister has also announced a patent box type of incentive for the first time wherein income received in the form of royalties and technology licence fees received by Indian companies are taxed at a reduced rate of 10% from the fiscal year 2016–17 onwards. The introduction of patent box which encourages output of R&D while the reduction of R&D tax incentives reduces the incentives for input to innovation. While an advance announcement of an R&D tax policy is creditworthy as it makes the policy a stable one, is the government justified in becoming less generous towards R&D investments by firms in that process? The only negative reaction to this reduction, hitherto, has come from the pharmaceutical and life sciences industry, which together account for over a quarter of the total business enterprise R&D expenditure in the country.2 The proposed streamlined reduction came as a rude shock because as part of its pre-budget lobbying the industry had been clamouring for an even more generous incentive: an increase in weighted tax deduction on R&D from 200% to 250% and expansion of the scope of the benefit to include R&D expenses incurred outside the facility like bioequivalence studies, clinical studies, patent filings and product registrations. So for the industry it was a double blow. The cliché “evidence-based policymaking” has been doing the rounds in government circles recently, but is this policy of a graduated reduction based on any empirical analysis?
Comments
EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.