The finance minister’s Budget proposal to enhance the weighted tax deduction on expenditure incurred for in-house research and development (R&D ) from 150% to 200% makes eminent sense. India’s R&D spending has dropped below 1% of GDP, and we need fiscal incentives to boost innovation and growth. Major economies routinely set aside about 3% of GDP, often more, for the purpose. Research shows that the bulk of growth derives from productivity improvements and attendant efficiency gains, not from factor inputs. Hence the need to shore up R&D. Last year’s Budget extended the scope for weighted deduction of 150% on expenditure incurred on in-house R&D to all manufacturing businesses, save for a small negative list. The practice till recently had been to restrict the deductions to only a few sectors like pharma and auto. Such selectivity is surely akin to licensing and obsolete. The latest move would incentivise R&D expenditure right across the board in manufactures, beyond the toptier corporates. Various studies suggest that routine, incremental innovations done in-house have large spillovers and societal gains. On the flip side, the proactive policy is open to abuse — passing off questionable expenses as R&D — but better corporate governance standards should put paid to the practice. Besides, in an increasingly competitive buyers’ market in most sectors, creatively accounting for R&D would hardly pay.
The Budget also proposes to enhance the weighted deduction on payments made to national laboratories, research associations, colleges, universities and other institutions for scientific research, from 125% to.... Source:Economic Times.
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