Skip to main content
SpringerLink
Log in

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

  • ORIGINAL ARTICLE
  • Published:
International Journal of System Assurance Engineering and Management Aims and scope Submit manuscript

Abstract

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. For example, A company named ‘20 Microns Nano Minerals Limited’ was registered under DSIR till 2018 but not afterwards. There were many such companies and therefore model with the time-varying treatment variable (DSIR registration status) is estimated.

References

  • Aghion P, Howitt P (1992) A model of growth through creative destruction. Econometrica 60:323–351

    Article  MATH  Google Scholar 

  • Aghion P, Howitt P (1998) A Schumpeterian perspective on growth and competition. In: Coricelli F, Matteo MD, Hahn F (eds) New theories in growth and development. Palgrave Macmillan

    MATH  Google Scholar 

  • Agrawal A, Rosell C, Simcoe T (2020) Tax credits and small firm R&D spending. Am Econ J Econ Pol 12(2):1–21

    Article  Google Scholar 

  • Agrawal A, Rosell C, Simcoe TS (2014) Do tax credits affect R&D expenditures by small firms? Evidence from Canada, NBER Working Paper 20615

  • Arrow KJ (1962) Economic welfare and the allocation of resources to invention. The rate and direction of inventive activity. Princeton University Press

    Google Scholar 

  • Athukorala PC, Kohpaiboon A (2010) Globalization of R&D by US-based multinational enterprises. Res Policy 39(10):1335–1347

    Article  Google Scholar 

  • Bacinello E, Tontini G, Alberton A (2020) Influence of maturity on corporate social responsibility and sustainable innovation in business performance. Corp Soc Responsib Environ Manag 27(2):749–759

    Article  Google Scholar 

  • Berger PG (1993) Explicit and implicit tax effects of the R & D tax credit. J Accounting Res 31(2):131–171

    Article  Google Scholar 

  • Blandinieres F, Steinbrenner D, Weiß B (2020) Which design works? A meta-regression analysis of the impacts of R&D tax incentives. A meta-regression analysis of the impacts of R&D tax incentives, 20-010

  • Bloom N, Griffith R, Van Reenen J (2002) Do R&D tax credits work? Evidence from a panel of countries 1979–1997. J Public Econ 85(1):1–31. https://doi.org/10.1016/S0047-2727(01)00086-X

    Article  Google Scholar 

  • Bloom N, Van Reenen J, Williams H (2019) A toolkit of policies to promote innovation. J Econ Perspect 33(3):163–184

    Article  Google Scholar 

  • Bozio A, Irac D, Py L (2014) Impact of the research tax credit on R&D and innovation: evidence from the 2008 French reform, Banque de France Working Paper 532

  • Bronzini R, Piselli P (2016) The impact of R&D subsidies on firm innovation. Res Policy 45(2):442–457

    Article  Google Scholar 

  • Brown JR, Martinsson G, Petersen BC (2017) What promotes R&D? Comparative evidence from around the world. Res Policy 46(2):447–462. https://doi.org/10.1016/j.respol.2016.11.010

    Article  Google Scholar 

  • Cappelen Å, Raknerud A, Rybalka M (2012) The effects of R&D tax credits on patenting and innovations. Res Policy 41(2):334–345. https://doi.org/10.1016/j.respol.2011.10.001

    Article  Google Scholar 

  • Chen Z, Liu Z, Suárez Serrato JC, Xu DY (2021) Notching R&D investment with corporate income tax cuts in China. Am Econ Rev 111(7):2065–2100. https://doi.org/10.1257/aer.20191758

    Article  Google Scholar 

  • Colombo MG, Luca G, Samuele M (2011) R&D subsidies and the performance of high-tech startups. Econ Letters 112(1):97–99

    Article  Google Scholar 

  • Corchuelo MB, Martínez-Ros E (2009) The effects of fiscal incentives for R&D in Spain, Universidad Carlos III de Madrid Working Paper 09-23

  • Czarnitzki D, Hanel P, Rosa JM (2011) Evaluating the impact of R&D tax credits on innovation: a micro econometric study on Canadian firms. Res Policy 40(2):217–229. https://doi.org/10.1016/j.respol.2010.09.017

    Article  Google Scholar 

  • Dechezleprêtre A, Einiö E, Martin R, Nguyen KT, Van Reenen J (2016) Do tax incentives for research increase firm innovation? An RD design for R&D (No. w22405). National Bureau of Economic Research

  • Duguet E (2010) The effect of the R&D tax credit on the private funding of R&D: An econometric evaluation on French firm level data. Available at SSRN 1592988

  • Eisner R, Albert SH, Sullivan MA (1984) The new incremental tax credit for R&D: incentive or disincentive? Natl Tax J 37(2):171–183

    Article  Google Scholar 

  • Frantzen D (1998) R & D, international technical diffusion and total factor productivity. Kyklos 51:489–508

    Article  Google Scholar 

  • Gao (1989) Tax policy and administration: the research tax credit has stimulated some additional research spending. U.S. Government Accountability Office, Washington

  • Gao (2009) Tax policy: the research tax credit’s design and administration can be improved. U.S. Government Accountability Office, Washington

  • Griliches Z (1958) Research costs and social returns: hybrid corn and related innovations. J Polit Econ 76:141–154

    Google Scholar 

  • Griliches Z (1980) Returns to research and development expenditures in the private sector. New developments in productivity measurement. University of Chicago Press, pp 419–462

    Google Scholar 

  • Griliches Z, Mairesse J (1984) Productivity and R&D at the firm level. Am Econ Rev 84:66–83

    Google Scholar 

  • Guceri I (2018) Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes. Int Tax Public Financ 25(1):1–63. https://doi.org/10.1007/s10797-017-9438-3

    Article  Google Scholar 

  • Guceri I, Liu L (2019) Effectiveness of fiscal incentives for R&D: Quasi-experimental evidence. Am Econ J Econ Policy 11(1):266–291

    Article  Google Scholar 

  • Hægeland T, Møen J (2007) Input additionality in the Norwegian R&D tax credit scheme, Reports 2007/47 Statistics Norway

  • Hall B, Van Reenen J (2000) How effective are fiscal incentives for R&D? A review of the evidence. Res Policy 29(4–5):449–469

    Article  Google Scholar 

  • Hausmann R, Rodrik D (2003) Economic development as self-discovery. J Dev Econ 72(2):603–633

    Article  Google Scholar 

  • Ivus O, Jose M, Sharma R (2021) R&D tax credit and innovation: Evidence from private firms in India. Res Policy 50(1):104128. https://doi.org/10.1016/j.respol.2020.104128

    Article  Google Scholar 

  • Jaffe A (1996) Economic analysis of research spillovers: implications for the advanced technology program. Econ Anal 1:14

    Google Scholar 

  • Klette T, Kortum S (2002) Innovating firms and aggregate innovation, NBER Working Paper 8819. National Bureau of Economic Research

  • Ladinska E, Non M, Straathof B (2015) More R&D with tax incentives? A meta-analysis (No. 309). CPB Netherlands Bureau for Economic Policy Analysis

  • Boris L, Mohnen P (2012) How effective are level-based R&D tax credits? Evidence from the Netherlands. Appl Econ 44(12):1527–1538

    Article  Google Scholar 

  • Lokshin B, Mohnen P (2013) Do R&D tax incentives lead to higher wages for R&D workers? Evid Neth Res Policy 42(3):823–830. https://doi.org/10.1016/j.respol.2012.12.004

    Article  Google Scholar 

  • Lucas R (1988) The mechanics of economic growth. J Monet Econ 22:3–42

    Article  Google Scholar 

  • Mansfield E (1965) Rates of return from industrial research and development. Am Econ Rev 55(1/2):310–322

    Google Scholar 

  • Mansfield E (1984) R&D and innovation: some empirical findings. In: Griliches Z (ed) R&D, patents, and productivity. University Press for National Bureau of Economic Research, pp 127–154

    Google Scholar 

  • Mansfield E, Switzer L (1985) The effects of R&D tax credits and allowances in Canada. Res Policy 14(2):97–107. https://doi.org/10.1016/0048-7333(85)90017-4

    Article  Google Scholar 

  • McKenzie KJ, Sershun N (2010) Taxation and R&D: an investigation of the push and the pull effects. Can Public Policy 36(3):307–324. https://doi.org/10.3138/cpp.36.3.307

    Article  Google Scholar 

  • Moretti E, Wilson DJ (2017) The effect of state taxes on the geographical location of top earners: evidence from star scientists. Am Econ Rev 107(7):1858–1903. https://doi.org/10.1257/aer.20150508

    Article  Google Scholar 

  • Mulkay B, Mairesse J (2013) The R&D tax credit in France: assessment and ex ante evaluation of the 2008 reform. Oxf Econ Pap 65(3):746–766

    Article  Google Scholar 

  • Mun HW (1991) Korea's total factor productivity, Seoul: Korean Productivity Center. https://doi.org/10.3386/w5506

  • Nadiri MI, Kim S (1996) International R&D spillovers, trade and productivity in major OECD countries

  • Nelson RR (1959) The simple economics of basic scientific research. J Polit Econ 67(3):297–306

    Article  Google Scholar 

  • Oxera (2006) Feasibility study for potential econometric assessment of the impact of R&D tax credits on R&D expenditure, HM Revenue and Customs Research Report 19, Oxford. http://www.innovation-policy.org.uk/compendium/reference/Default.aspx?referenceid=124

  • Qiu L, Jie X, Wang Y, Zhao M (2020) Green product innovation, green dynamic capability, and competitive advantage: Evidence from Chinese manufacturing enterprises. Corp Soc Responsib Environ Manag 27(1):146–165

    Article  Google Scholar 

  • Rao N (2016) Do tax credits stimulate R&D spending? The effect of the R&D tax credit in its first decade. J Public Econ 140:1–12. https://doi.org/10.1016/j.jpubeco.2016.05.003

    Article  Google Scholar 

  • Rodrik D (2004a) Industrial Policy for the Twenty-First Century, CEPR Discussion Paper 4767. Centre for Economic Policy Research

  • Rodrik D (2004b) Industrial policy for the twenty-first century. Available at SSRN 666808. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=666808

  • Romer P (1990) Endogenous technological change. J Polit Econ 98:71–102

    Article  Google Scholar 

  • Schumpeter J (1962) The theory of economic development. Springer

    Google Scholar 

  • Suat LA, San OT (2019) Corporate environmental management: eco-efficiency and economics benefits among manufacturers certified with EMS14001 in Malaysia. Int J Recent Technol 7(6):873–886

    Google Scholar 

  • Wang J (2018) Innovation and government intervention: a comparison of singapore and hong kong. Res Policy 47(2):399–412

    Article  Google Scholar 

  • Yang C-H, Huang C-H, Hou T-T (2012) Tax incentives and R&D activity: firm-level evidence from Taiwan. Res Policy 41(9):1578–1588

    Article  Google Scholar 

  • Yohei KOBA (2011) Effect of R&D tax credits for small and medium-sized enterprises in Japan: evidence from firm-level data, RIETI Discussion Paper

Download references

Funding

No funds, grants, or other support was received.

Author information

Authors and Affiliations

  1. University School of Management and Entrepreneurship, Delhi Technological University, Delhi, India

    Aakanksha Kaushik

Authors
  1. Aakanksha Kaushik
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Aakanksha Kaushik.

Ethics declarations

Conflict of interest

I declare that there are no financial and non-financial conflicts of interest.

Human or animal rights

The Research does not involve Human Participants and/or Animals.

Informed consent

Not applicable.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Kaushik, A. The effectiveness of research and development tax incentives in India: a quasi-experimental approach. Int J Syst Assur Eng Manag 14, 2329–2336 (2023). https://doi.org/10.1007/s13198-023-02077-x

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s13198-023-02077-x

Keywords

JEL Classification

Search

Navigation