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The Misdirected Policy Changes in R&D Tax Incentives
Over the years, the government has provided tax incentives for companies investing in research and development. Since 2016, the policy has seen an overhaul, with some older incentives withdrawn while new ones being introduced. That year, the government launched the patent box regime and tax holidays for innovation-based start-ups. It also reduced income-tax weighted deduction on R&D expenses from 200% to 150%, which was further reduced to 100% in 2020. Recently, the Union Budget 2022–23 saw the withdrawal of a few customs-duty exemptions for R&D. India has seen relatively low investment in R&D, which calls for policy changes. However, the effi cacy of some of these recent changes is questionable.
Globally, governments provide significant tax incentives to corporations for expenditure on research and development (R&D) to foster innovation. Studies have argued that India’s tax regime has been more liberal and generous than most countries (Mani 2014; Saha and Shaw 2018). However, the efficacy of the policy has been questionable.
When compared with the world’s top 10 economies (in terms of gross domestic product [GDP]), India’s gross expenditure on R&D (GERD) is the lowest at only 0.7% of GDP1 for 2019–20. At 41.3%, the share of business enterprises in GERD also remains low. Major world economies spend at least 1.5% of their GDP on R&D,2 and business enterprises finance at least 50% of it.
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