Page 293 - ES 2020-21_Volume-1-2 [28-01-21]

276 Economic Survey 2020-21 Volume 1

R&D Tax Incentives in India: India has had a generous R&D tax incentive framework. Finance Act
2016, w.e.f. April 2018, allowed a weighted deduction of 150 per cent of expenditure w.r.t. scientific
research on in-house R&D facility as compared to 200 per cent earlier. Finance Act 2016 further
allowed for reduction of this deduction to 100 per cent from assessment year beginning on or after
April 1, 2021. The Taxation Laws (Amendment) Act 2019 amended the Income Tax Act 1961 and
Finance (No. 2) Act 2019, allowing domestic companies the option to pay income tax @22 per cent
subject to the condition that they will not avail any exemption/incentive. The effective rate for these
companies was made 25.17 per cent inclusive of surcharge and cess. These companies were also not
required to pay Minimum Alternate Tax.
To put this in perspective, the USA provided R&D tax relief in 2019 through an incremental R&D
tax credit with four components: two main modalities – regular research credit (20 per cent headline
rate) and alternative simplified credit (6-14 per cent headline rate) - which were mutually exclusive
in their use and two additional specific schemes (20 per cent headline rate), which only applied to
certain expenses for basic research and energy research (OECD). China in 2019 provided R&D tax
relief through volume-based R&D tax allowance, with headline rates being 75 per cent for SMEs and
large enterprises, which increased from 50 per cent earlier (OECD). In 2019, Japan offered volume-
based and incremental tax credits that could be claimed in combination, with headline rates under
different schemes ranging between 6-30 per cent and overall R&D tax benefits capped at 45 per cent
of the corporate income tax liability before the credit was applied (OECD). Germany offered no
expenditure based R&D tax support (OECD, 2018)

IS INDIA EFFECTIVELY TRANSLATING INNOVATION INPUTS INTO
INNOVATION OUTPUTS?

8.50 Figure 44 examines the relationship between innovation inputs and innovation outputs.
Economies below the line are unable to effectively translate their costly investments in
innovation inputs to better quality and more innovation outputs. It may be seen that India
is able to effectively translate investments in innovation inputs to produce a higher level of
innovation outputs. This implies that India stands to gain more from its investments into
innovation than many other countries. With higher investments, it may be possible that
this relationship between innovation inputs and innovation outputs becomes even more
favourable for India, and there is greater “bang for the buck” as regards India’s investments
in innovation.