Retain tax sops for genuine r&d

Retain tax sops for genuine r&d

Technology will decide future competitiveness.

Even as the Direct Tax Code’s call to prune tax exemptions is unexceptionable, it would be sensible to retain those for research and development (R&D). The fact is that low R&D expenditure, especially in the private corporate sector, is a key challenge facing the innovation ecosystem in India, and we need to boost R&D spending with attractive tax incentives. Of course, eliminating the opportunity for businessmen to make money from anything other than core business activity — say, by diverting project funds during the course of implementation or taking a kickback from the seller while making an acquisition at an inflated cost — would, coupled with low tariffs that expose them to foreign competition, focus attention on competitiveness and spur efforts for genuine R&D.

India’s R&D spending as a percentage of GDP is a lacklustre 0.7%, a third of the figure for China and a sixth of that for South Korea. Further, while the private sector’s share in R&D investments is in the 65-75% range in dynamic nations, it is barely 30% in India. Our number of R&D specialists per million people is just over 200; compared to 1,100 in China and over 4,000 in the US. India has, of late, risen in global innovation rankings, has the third largest number of start-ups and is among the few nations with credible space technology. And multinational corporations have set up over 1,100 R&D centres here. But Indian industry remains a laggard in advanced technology.

We surely need to policy-design and incentivise knowledge creation system, so as to rapidly digitise, innovate and better integrate with the global economy. Note that the Finance Act, 2016, did amend Section 35(2AB) of the I-T Act, 1961, and reduced the weighted tax deduction available for in-house R&D from 200% to 150%, effective from April 1, 2017, till March 31, 2020. From next fiscal, the tax benefit would come down to 100%. The guidelines have since been further amended, and capital work in progress, attending consultation meetings or vehicle purchase are no longer defined as R&D. Prune waste, but retain incentives for genuine R&D.