The effectiveness of research and development tax incentives in India: a quasi-experimental approach

Globally, governments provide significant tax incentives to business enterprises for research and development (R&D) expenditure to foster innovation. Several fiscal incentives are provided to firms registered under India’s department of scientific and industrial research (DSIR). India provided a super deduction of 200% on R&D expenses in 2011, reduced to 150% in 2016 and 100% in 2020. The study uses firm-level data to test the effectiveness of incentives offered in India and analyze the impact of the rationalization of super deduction. For the study, the difference in difference analysis is done to evaluate the changes in the outcome variables: total, current, and capital R&D expenditures. The treatment group is the firms registered under DSIR. The results show a significant impact of the mix of tax incentives provided on both current and capital expenditures. The super deduction significantly impacted only current expenses and not capital expenditures. The administrative costs under current expenditures are easier to relabel than capital expenditures. The study shows that the overly generous regime incentivized firms to relabel their non-R&D costs as R&D expenses for profiteering. The study supports the move to reduce the super deduction.