Levy higher taxes and R&D cess on profits of large private companies to promote indigenous R&D and self-reliance

To

Smt Nirmala Sitharaman

Union Finance Minister

Dear Smt Sitharaman,

According to “Research and Development Statistics, 2019-20” published by the Department of Science & Technology (DST), India’s national investment in R&D is abysmally low, stagnating at around 0.6-0.7% of GDP. Compared to it, countries at the forefront of technology development such as the USA (2.8% of GDP), China (2.1%), Israel (4.3%) and South Korea (4.8%) spend far more on R&D. The Science & Technology Policy in our case states that the nation’s objective should be to enhance R&D investment to 2% of GDP but such a policy has remained merely a wish so far, in the absence of any tangible steps taken by the government to increase the budgetary allocations for R&D, strengthening the institutional framework for it and setting for itself specific R&D goals to be realised in a time-bound manner.

The reason for the failure of the government to take meaningful measures to strengthen indigenous R&D infrastructure is primarily the lack of clarity on its part to identify and prioritise the socioeconomic and strategic concerns that indigenous R&D should address, its unwillingness to strengthen the academic and scientific institutions in the country and its failure to strengthen the CPSEs so as to enable them to play a central role in promoting R&D and technology development for making the economy self-reliant. The government’s unduly excessive dependence on the private sector for promoting R&D efforts is ill-advised and counter-productive.

The following examples corroborate this.

1. The combined budgetary allocations made for the Department of Science & Technology (DST) and the Department of Scientific & Industrial Research (DSIR) during the last three years stagnated at around Rs 11,300-13,700 Crores with the already marginal capital component declining further from Rs 144 Crores to Rs 97 Crores. Such budgetary allocations are negligible compared to the responsibilities that the two departments are expected to fulfil.
2. The government recently announced an allocation of Rs 50,000 Crores to be spread over a 5-year timeframe for the newly set up statutory National Research Foundation (NRF), out of which Rs 36,000 Crores is to come from the private sector and Rs 14,000 Crores from the government. In other words, in the name of NRF, the government plans to spend only Rs 2,800 Crores per year on average on R&D, a minuscule allocation by any standard. Private sector spending of Rs 7,200 Crores per year on R&D will be subject to IPR constraints which in turn will lead to the R&D outcomes not being accessible to others.
3. Compared to the above-cited NRF allocation, the government has indicated earmarking Rs 2 lakh crores for giving outright subsidies to profit-earning private companies under the PLI and the other PLI-like schemes announced for ten sectors. This works out to Rs 40,000 Crores per year on average, three times the total budgetary allocation for DST and DSIR this year! The PLI subsidies are open-ended, linked only to the beneficiary companies achieving certain prescribed levels of production, without their having to fulfil more important requirements such as providing gainful employment opportunities, yielding net domestic value addition, fulfilling export obligations and so on.
4. The Dept of Public Enterprises (DPE) guidelines require the Maharatna/ Navratna CPSEs to invest at least 1% of profit after tax (PAT) on R&D. For the Miniratna CPSEs, the corresponding requirement is 0.5% of PAT. As a result of the Finance Ministry’s undue reliance on dividend payments by the CPSEs as a means to generate additional fiscal resources, most CPSEs find it difficult to fulfil the above-cited requirement. In other words, the Finance Ministry is indirectly forcing the CPSEs to pay dividends in preference to investing in R&D, which reflects priorities that do not uphold the public interest.

No wonder, India is lagging far behind several other countries in technology innovations, which are necessary for the nation to be self-reliant.

Recently, the Australian Strategic Policy Institute (ASPI) has attempted a comprehensive inter-country assessment of technology leadership, which can be readily accessed at https://www.aspi.org.au/report/critical-technology-tracker. The study is an eye-opener, as it shows the following.

1. China leads in 37 out of 44 critical technologies that ASPI is tracking (e.g. nanoscale and composite materials, high-specification manufacturing processes, artificial intelligence, quantum sensors, synthetic biology, photonic sensors, hypersonics, advanced robotics and so on)
2. In some of those technologies, all of the world’s top 10 leading research institutions are based in China and are collectively generating nine times more high-impact research papers than the second-ranked country, the USA.
3. In almost all the 37 technologies in which China leads, it has a near monopoly hold over them.
4. India figures at a distant 3rd/ 4thposition in every one of these 44 technologies. The gap between China (also the USA) and India is quite wide.
5. China has gained technology leadership by investing heavily in its domestic research institutions and deploying its State-controlled undertakings to implement its technology strategy

What India is doing at present is diametrically opposite to how China has been able to gain technology leadership. India’s disinvestment policy, supplemented by other related measures, tends to weaken the CPSEs rather than strengthen them, posing a serious threat to the country’s economic self-reliance. It is diverting its scarce fiscal resources to give huge, ill-focussed subsidies to profit-earning private companies, with no expectation of commensurate social returns. The Finance Ministry’s myopic policy of forcing the CPSEs to pay huge dividends to the government has eroded their capacity to invest in R&D.

It is imperative that the government enhances R&D allocations in the budget, strengthens the R&D capabilities of the domestic academic/ scientific institutions and enables the CPSEs to play the central role in moving towards technology self-reliance in strategic fields. To raise sufficient fiscal resources for implementing such a strategy, in addition to moving away from the present approach of subsidising private companies under PLI-like schemes, consequently saving scarce fiscal resources, the government should also enhance taxation of the profits of large private businesses.

Annex 7 of the Receipts Budget of the 2023-24 budget document shows how the existing taxation structure is heavily skewed in favour of large private companies at the cost of the smaller ones. For example, as a result of a slew of tax incentives, the average net effective tax rate in the case of companies earning profits in excess of Rs 500 Crores is only 19.14% compared to 24.82% in the case of those earning profits less than Rs 1 Crore. No wonder such a warped tax structure has resulted in a continuing increase in the concentration of wealth and increasing income inequalities, running counter to Article 39(c) [to reduce the concentration of wealth] and Article 38(2) [reduce income inequalities]. The government needs to reverse this trend by levying higher taxes on big businesses.

Economic liberalisation measures initiated in 1991 have resulted in an undue increase in the political clout of big businesses in India. Such an increased political power in the hands of the corporates has become more conspicuous in recent times, with the political executive opening the floodgates to corporate political donations by introducing highly regressive amendments to the Companies Act and the Foreign Contributions Regulation Act (FCRA) and introducing opacity in relation to the source of political donations by adopting an equally regressive scheme of Electoral Bonds. This in effect has prompted the present government to make corporate-friendly changes in important laws such as the Forest (Conservation) Act and the Mines & Minerals (Development & Regulation) Act. It has also compromised the government’s ability and willingness to subject the big businesses to enhanced taxation, as it ought to have, in line with the obligation cast on it by the Directive Principles. Electoral wins cannot and should not imply that the political executive can act as it wishes, against the values envisaged in the Constitution. It is high time that the government takes note of this. It should also appreciate the harsh reality that the concentration of wealth and worsening income inequalities retard economic growth in the long run, not accelerate it.

Big businesses in India could not have earned profits without taking advantage of the enormous social capital that is available and without tapping the R&D infrastructure that has evolved in the country over the last several decades. They cannot, therefore, absolve themselves of their responsibility to give back what is due to society.

The average corporate taxation rates in most developed countries are far higher than in India, which explains how those countries are in a position to make higher R&D investments.

Against this background, I suggest that the government urgently considers not only enhancing the tax rates applicable to big businesses but also levying a statutory R&D cess on the profits earned by private companies in excess of Rs 100 Crores. Both the overall tax rates and the R&D cess could be on a graded scale linked to the profits. In particular, the government should levy a higher R&D cess on the profits earned by all PLI beneficiary companies. The proceeds from such a cess may be credited to an R&D fund to be administered by the DST/DSIR. DST/DSIR should utilise that fund to provide support to universities, and other academic/scientific institutions to direct research efforts towards strategic fields and towards strengthening the existing social security systems through technological innovation.(https://countercurrents.org/2023/07/length-of-the-last-mile-how-well-the-welfare-schemes-fare-in-the-last-mile/)

If the government fails to adopt measures as suggested above and continues to underspend on R&D, I am afraid that it will continue to erode the R&D strength of the nation, posing a serious threat to its economic independence.

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to the Government of India

Visakhapatnam