INTRODUCTION

In a developing country like India, it is very pertinent to its growth that the tax laws promote
Research and development and give encouragement for new innovations, R&D companies
etc. benefits for setting shop in India. There happen to be many different incentives for
Research and innovation although certain level of lack of awareness can be sensed when
survey reports and other sources are glanced at regarding the utilizing of the benefits
provided to the R&D sector. In several areas of law their different contentions and
interpretation of the policy and provisions which make the mechanism difficult but in this
particular case the understanding of the policy or simply the existence of different schemes
and their use for several programs seems to be the biggest clog in people not availing the
incentives in Research and Development.
The fiscal year of 2011-2012 saw India grant a tax deduction of 200% in the R&d sector, 1
making it a select few countries with a “Super deduction” tag yet till 2016 only 1800
companies were availing the benefits of such grants some due to lack of awareness of such
policies and some even after having consulted full-fledged law firms in India got their
recognition process rejected by the Department of Scientific & Industrial Research (DSIR)
makes it ever more relevant how there is a desperate need to understand the application
process and the overall scheme in order to promote the intention of the law. Meanwhile
adding up to the negatives surrounding the mechanics of the provision the recent
amendments such as changing of the deduction of 200% to 150% and in 2017 to being
phased out to 100% in 2020-21 Fiscal Year 2 there has been a lot of discouragement in this
department the confusion is even more obscure given the pandemic has recently affected the
world where Research and Development should be encouraged in such dire times. “While in
situation of COVID-19 in the US, the federal government had passed a bill of $2.2 trillion
incentives for the aid, relief and economic security of the country. Out of which, $500 billion
was set for large businesses while $377 billion was for the small business sector in terms of
R&D tax credits. This aid helped businesses pay their employees and continue running their
organizations and R&D programs after the stay-at-home restrictions were lifted.
This paper is intended to look at the trends of Tax Incentives in India and the lack of
awareness in India to avail the same as well as a comparative analysis of the same with other
countries.

1
National Income Tax Act 1995 cl Section 34(2AA)
2
Singh, N., 2020. A Survey Report of R&D Tax Incentives in India. [online] Dsir.in. Available at:
<https://www.dsir.in/assets/pdf/A-SURVEY-REPORT-OF-ON-RD-TAX-INCENTIVES-IN-INDIA.pdf>
[Accessed 24 April 2022].
 TAX INCENTIVES FOR R&D IN INDIA

“In India the tax credit system is volume-based Credits are available for all eligible research
and development expenses (including capital and income) undertaken by the in-house
research and development divisions. The initiative is implemented by the Department of
Science and Industrial Research (DSIR), which is a department of the Ministry of Education
Science and technology are important.” “The DSIR recognises and registers organisations
that meet certain criteria. in-house research and development divisions set up by corporate
industry in India, and Registration of the in-house R&D centre with the DSIR is a condition
for participation in the programme.the qualifying for the R&D tax incentive3 The firm must
demonstrate that it has an in-house research and development unit(s) in order to receive DSIR
designation. is involved in the manufacturing of medications and pharmaceuticals, as well as
technological devices Chemicals, equipment, computers, telecommunications equipment, and
other materialsaeroplane and helicopter manufacturing, vehicle manufacturing, and auto parts
manufacturing” The It is essential that research and development units are operational and
that research and development projects are well specified resulting in the creation of new
items or technological breakthroughs 4 . “In addition, the Department of Science and
Industrial Research (DSIR) demands that research and development activities be carried out
in India. In terms of intellectual property, there is no constraint on where it is located. A
corporation seeking recognition for its research and development unit(s) should submit an
application to the DSIR must also present its most recent annual report, as well as a synopsis
of its past”. Please include images of your current and prospective R&D efforts, as well as
photographs of freshly developed products.Items that have been produced or the use of
products or technology Every year, recognised companies are required to report on their
research and development operations. Every three years, they must submit a fresh application
to the DSIR in order to maintain their status. “Renewal is far from a certain conclusion. As a
result, registration with the DSIR is mandatory. It is time-consuming and labor-intensive for
a company to satisfy the strict requirements.initial recognition criteria as well as needs for
long-term maintenance the current registration status with the DSIR”
“The research and development tax credit programme has undergone several adjustments
throughout the years. When it came to in-house research and development, the government
offered a weighted tax deduction of 150 percent for firms in the following eight industries:
drugs and pharmaceuticals, electronic equipment, computers, telecommunications equipment,
chemical manufacturing, aircraft and helicopter manufacturing, automobile manufacturing,
and auto parts manufacturing. This tax deduction was available from 2001 to 2010. Seeds and
agricultural tools were added to the plan in the fiscal year 2009-10, making it applicable to a
total of four industries. Firms in all industries are now eligible for the R&D tax benefit,
which has been enhanced to 200 percent for the 2010-11 fiscal year. The deduction was
previously available only to research and development companies”. From the fiscal year
2017-18 onwards, policy amendments announced in the Union Budget in February 2016
3
Sikka (1998) surveys in-house R&D centres of innovative firms in India and analyses their R&D output
indicators
4
Companies engaged only in research at the time of application also qualify if they plan to manufacture. The
R&D units do not qualify if they are used exclusively for market research, operations and management
research, process and quality control, maintenance of commercial production or routine data collection
restored the “R&D tax deduction to its previous level of 150 percent. A further measure was
the implementation of the "Patent box," under which revenue earned in the form of royalties
and technological licences is taxed at a reduced rate (10%), beginning with the fiscal year
2016-17. From fiscal year 2020-21 forward, the deduction for research and development was
to be lowered to 100 percent. In addition to the Section 35(2AB) weighted tax deduction for
in-house research and development spending, manufacturing enterprises registered with the
DSIR are eligible for the following three additional fiscal incentives: I a ten-year tax holiday
for commercial research and development companies (which was discontinued in 2007); (ii)
an excise duty waiver for three years on goods produced based on indigenously developed
technologies and duly patented in any two countries among India, the United States, Japan,
and any one country of the European Union;” and (iii) an accelerated depreciation allowance
on plant and machinery set-up based on indigenous technology (which was discontinued in
2007). Only 8 (out of 804) of the enterprises in the mentioned sample have taken advantage
of these tax breaks.5 “During the fiscal years 2001-10 the firms were which were given 150%
tax deductions but during the 2011-16 fiscal period the productivity of the firms increased
substantially which was due to two factors (i) the increase of tax deductions from 150 to
200% and (ii) due to the eligibility criteria for the 200% R&D tax credit for firms that
received initial DSIR recognition after the reform. The numbers were such that R&D costs
reduced by 33%, the innovation and productivity of these firms increased by a great margin
the result of the DSIR registration increased their expenditure by 78% and their IPO and
USPTO patent application had increased by 11% and 6% respectively.6” This data and the
trend where post 2017 the involvement in R&D was decreased significantly the post 2020
deductions without any considerations brought more criticism from the pharmaceutical and
seed industry houses in house R&D teams7. “Apart from a survey report there isn’t much data
to support the claim that reduction is entirely a bad thing in many developed countries is
encouraged for R&D firms to invest more and a sizeable cover of around 50% is made by the
government to not incur loses itself there needs to be more data set collection for determining
the merits and demerits of the tax deductions from 150 to 100%. Meanwhile the firms
continue to claim they have incurred sizeable losses due to deductions and demanded
restoration of the same in the survey8 as well as there were hopes of improvement before the
announcement of the FY 2022-23 budget to no avail.”
“The encouragement of innovation, particularly through R&D tax incentives, must take into
account the two challenges listed below. First and foremost, the government wants business
enterprises to spend more on research and development because such investments by private
sector enterprises are a critical conduit for the government's overall research intensity target,
which has been stated in successive innovation policy statements since 2003, to be met.
However, even if the quantity of investment in research and development is increased as a
result of tax breaks and other incentives, this will not inevitably result in increased”
“innovation. How well firms manage the innovation process, how well they organise and
5
Ivus, O., Jose, M. and Sharma, R., 2021. R&amp;D tax credit and innovation: Evidence from private firms in
india. Research Policy, 50(1), p.104128.
6
Ibid
7
2022. [online] Available at: <https://www.thehindubusinessline.com/companies/seed-industry-wants-
restoration-of-200-tax-deduction-for-rd/article30576008.ece> [Accessed 23 April 2022].
8
Singh, N., 2020. A Survey Report of R&D Tax Incentives in India. [online] Dsir.in. Available at:
<https://www.dsir.in/assets/pdf/A-SURVEY-REPORT-OF-ON-RD-TAX-INCENTIVES-IN-INDIA.pdf> [Accessed 24
April 2022]
encourage their scientists, and how well they pick which ideas to pursue and what to discard
are all critical factors. Second, innovation surveys conducted in both developing and
developed nations, including India, have revealed that in-house research and development by
companies accounts for little more than a third of the total innovation expenditures made by a
typical company. 9In addition to intra-mural R&D, there are a slew of non-R&D channels,
such as the acquisition of the most recent vintage of capital goods, the training of technicians,
and so on, that lead to innovations in enterprises as well. As a result, defining innovation
policy almost purely in terms of research and development policy may not be the most
judicious and comprehensive approach.””

“It is necessary to balance reductions in R&D subsidies with an overhaul of the content and
design of innovation policy tools that allow the funding of innovative projects more broadly.
Finally, any successful monitoring and assessment of such a generous plan must be based on
high-quality empirical evidence rather than just repeating the mantra that policy development
and implementation must be evidence-based time and time again. It is necessary to encourage
the Department of Science and Industrial Research (DSIR) to publish a list of enterprises that
have actually taken advantage of the scheme each year, along with the amount of subsidy
claimed (or tax foregone), the amount of R&D expenditure carried out, and some indicators
of the quantity of output produced as a result of this innovative activity. Because of the lack
of such proof, policies in India will continue to be influenced by the politics of lobbying and
other important non-technical reasons.””

9
2022. [online] Available at: <https://www.thehindubusinessline.com/companies/seed-industry-wants-
restoration-of-200-tax-deduction-for-rd/article30576008.ece> [Accessed 23 April 2022].