Economic Policy and Incentive Analysis

This assignment delves into the realm of economic policy analysis, specifically examining the role of incentives in shaping various sectors. It requires a critical evaluation of different types of incentives, such as tax breaks, subsidies, and regulatory measures, and their intended and unintended consequences. The analysis should encompass diverse areas like renewable energy, housing, corporate taxation, and conservation, drawing upon relevant academic literature to support arguments and findings.

Running head: TAX
Tax
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction................................................................................................................................2
Definition of R&D:....................................................................................................................2
Tax Incentives Provided.............................................................................................................3
Tax Implication of the incentive................................................................................................3
Relevant Rules of Taxation........................................................................................................6
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

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Introduction
One of the factors that is going to ensure that an entity remains ahead of its
competition in the market in pursuance of carrying out the business operation, is that the
entity is adapting to the changes taking place in the market be it in terms of new technology
or methodology in carrying out the business activities. Research and development activities
within the organisation help it to develop and implement new ways or products in its
production method or line of products respectively. It ensures that the company maintains a
competitive edge over its competitors1. The development of new products or technologies by
the business entities not only proves to be beneficial for them but also for the entire society as
well. For e.g. if automobile industry develops vehicles which run entirely on electricity, it
will not only help the companies to earn more revenue but the society will be able to reduce
the usage of fossil fuel thereby reducing the carbon footprint and improving the quality of
environment. Thus, in order to promote research and development activities by the companies
the statute gives many tax incentives in respect of expenditure incurred in this behalf. These
incentives are being categorised as R&D incentives. The document is focussed on discussion
about the various tax incentives offered by the statute and the conditions that need to be
fulfilled in order to avail them.
Definition of R&D:
The activities conducted under the tag of Research and Development are investigative
in nature. They are the efforts made by an enterprise to improve its current products and
services or to develop a new kind of product or service that will enable it to deliver better
quality or retain its present quality but with improved way of production2. It as an endeavour
1 Taylor, Grantley, and Grant Richardson. "Incentives for corporate tax planning and reporting: Empirical
evidence from Australia." Journal of Contemporary Accounting & Economics10, no. 1 (2014): 1-15.
2 De Silva, P. N. K., S. J. R. Simons, and P. Stevens. "Economic impact analysis of natural gas
development and the policy implications." Energy Policy 88 (2016): 639-651.

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to utilise the present capacity of the organisation or to improve its capacity of delivering
products and services.
Tax Incentives Provided
In case of companies the Research and development concession that have been
allowed before 1 July is up to 125% of the allowed expenditures on the research and
development. In some cases the up to 175% of the expenditure can be claimed as deduction.
The tax offset is provided by Research and development incentive in order to encourage the
companies to engage in the research and development activity3. The R&D concession has two
component:
 In case of certain entities that are eligible for the R&D incentive a refundable tax
offset of 43.5% are allowed for companies that have turnover less than 20 million.
 For non-refundable tax offset 38.5% is allowed for all the eligible entities.
The R&D tax offset have been reduced to 30% and this changes are applicable after 1
July 2004 up to 1 July 20244.
Tax Implication of the incentive
Better operating efficiency of the businesses:
In pursuance of finding better ways of doing business or improving the quality of the
product the company usually finds out for itself some new improved and efficient manner of
operating. For e.g. if the company did a research on how to minimise the use of coal in its
production line for the generation of power, it will come up with an alternative source of
clean and efficient form of energy5. This will help it in increasing its operational efficiency of
3 Bösenberg, Simon, and Peter H. Egger. "R&D tax incentives and the emergence and trade of
ideas." Economic Policy 32, no. 89 (2017): 39-80.
4 Zhao, Zhen-Yu, Yu-Long Chen, and Rui-Dong Chang. "How to stimulate renewable energy power generation
effectively?–China's incentive approaches and lessons." Renewable Energy 92 (2016): 147-156.
5 Shen, Liyin, Bei He, Liudan Jiao, Xiangnan Song, and Xiaoling Zhang. "Research on the development of main
policy instruments for improving building energy-efficiency." Journal of Cleaner Production 112 (2016): 1789-

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the business as it no longer will have to worry about the carbon foot print it was leaving
earlier thereby attracting various sorts of restrictions and stipulations from the government
authorities. It will not have to worry about the disposal of the residue left behind by the burnt
coal. It will be saving costs as well as will be able to curb the government interference in its
business to a significant extent.
Improved business performance:
While the new and improved way of doing business increases the operating efficiency of
the companies, it simultaneously leaves its marks on the financial performance of the
companies. The company employing the most efficient factors of business is able to maintain
a competitive edge over the competitors along with generating goodwill for the company.
The customers get a better quality product and thereby becoming loyal customer of the
company6. This is reflected in the financial statements of the company in form of growth in
revenue. As the company utilises improved way of production it is able to reduce its
operating costs thereby further catapulting the financial performance of the company by
increasing the profits of the company and creating wealth for the shareholders of the
company.
Proper maintenance of books and records:
This is one more way in which the incentives have been able to increase the
accountability of the businesses indirectly. In order to avail the benefits of the tax incentives
the companies must endeavour in making and keeping proper records in respect of their
expenditures and the returns they got from it. They need to keep the record of both the
income and expense related to the scientific research is because of the fact that the statute has
1803.
6 Duncan, Greg J., Katherine Magnuson, and Elizabeth Votruba-Drzal. "Boosting family income to promote
child development." The Future of Children 24, no. 1 (2014): 99-120.

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put stipulation on the nature of the expenditures that the company is allowed to make in order
to avail the tax incentives7. At the same the recording of income is very important because of
the fact that it has been clearly spelt out by the statute that the expenditure must yield the
company some benefits in real terms. Therefore in order to establish the nature of expenditure
and that they are abiding by the stipulation out by the law and the authenticity of the returns
earned from them the company has to maintain proper and updated records as per the
guidelines of the accounting system prevalent in the country. this has ensured that the
company present true and correct information in their financial statements and this in turn
helps the shareholders in getting a true and fair view of the organisation financial position
and performance8.
Spike in the levels of research activity:
The tax incentives have motivated the business entities in engaging themselves in the
research activities. This has resulted in the spike in the research oriented activities with the
country. The spike not only promotes the scientific culture within the country but also opens
several employment opportunities for the students and entrepreneurs who want to pursue
research activities as their career choice. The research activities helps in promoting the
development of new and improved products as well as ways of carrying out the business
activities thereby helping the businesses as well as the society at large.
Following the provisions laid down by the tax laws:
The benefits of the tax provisions are available to only those companies which
maintain full compliance with the tax laws of the statute. There are many conditions and
stipulation which are needed to be abided by the companies in order to avail the tax
7 Hilber, Christian AL. "UK Housing and Planning Policies: the evidence from economic research." (2015).
8 Kamal, Sristi, Małgorzata Grodzińska-Jurczak, and Gregory Brown. "Conservation on private land: a review
of global strategies with a proposed classification system." Journal of Environmental Planning and
Management 58, no. 4 (2015): 576-597.

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incentives9. In pursuance of getting the advantage of tax benefits the companies have
understood the importance of abiding by the conditions laid down in the ITAA 1936. Non-
compliance with any of the condition can cause the company to lose on the benefits of the tax
incentive. With this in mind the companies have started to comply with the provisions both in
letter and spirit.
Relevant Rules of Taxation
The Income Tax Assessment Act 1936 lays down several rulings with respect to the
conditions that must be followed to avail the tax incentives. It also specifies the type of
expenditures for which the company will be allowed a tax incentive or deduction from its
total income. The ruling which specifically deals with the provisions of tax incentives for the
research and development activities carried out by the organisation is TR92/210. The ruling
provides us with the specific types of expenditures which are allowed to be deducted from the
total income under section 73A of Income Tax Assessment Act 1936 to arrive at the taxable
income of the company. There is a general ruling given out in the sub section 1 of the section
73A that only such expenditures will be allowed as deduction under this section which are
not deductible under any other sections11. This avoids the chances of the companies availing
double tax benefits for the same expenditures incurred under different sections. The sub
section also makes it clear that any company which has listed itself on any recognised stock
exchange is allowed to avail the deductions in respect of the expenditure incurred on
scientific and research activities only if such activity has helped it to increase its revenue
generating capacity. In other words the expenditure must be incurred for the purpose of
9 Richardson, Grant, and Grantley Taylor. "Income shifting incentives and tax haven utilization: Evidence from
multinational US firms." The International Journal of Accounting 50, no. 4 (2015): 458-485.
10 Grubert, Harry, and Rosanne Altshuler. "Shifting the Burden of taxation from the Corporate to the
perSonal level and getting the Corporate tax rate down to 15 perCent." (2016).
11 Rode, Julian, Erik Gómez-Baggethun, and Torsten Krause. "Motivation crowding by economic incentives in
conservation policy: A review of the empirical evidence." Ecological Economics 117 (2015): 270-282.

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business only. The expenditures allowed as deduction from the income of the company to
compute its taxable income is as follows:
a) Amount paid by the company to an approved research institute for the purpose of
carrying out research activities on its behalf.
b) Payments made by the company to any approved research institute to carry out
research in the field to which the business activities of the business belong to.
The act has not put any stipulation on the place where the research needs to be conducted
by the research institute. In other words, the only thing that is crucial in determining the tax
implications of the amount contributed will be whether the research has been undertaken by
the institute on behalf of the company or in the field of its operation, it is immaterial whether
they are conducted in the company’s premises or in the institute itself12. It must be noted that
the above conditions were related to the amount contributed by the company to any approved
research institute. Apart, from these contributions the company can also get exemption with
respect to capital expenditure undertaken by it to promote research and development
activities in the organisation. There are certain purposes for which if the company incurs any
capital expenditures it will not be given any exemption for them. These purposes are given in
TR 92/213. They are as follows:
12 Swank, Duane. "Taxing choices: international competition, domestic institutions and the
transformation of corporate tax policy." Journal of European Public Policy 23, no. 4 (2016):
571-603.
13 Barteková, Eva, and René Kemp. "National strategies for securing a stable supply of rare
earths in different world regions." Resources Policy 49 (2016): 153-164.

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a) Plant and machinery acquired by the company in order to conduct research in its
premises.
b) Any expenditure is incurred to acquire land and building or,
c) Addition, alteration or extension is made by the company to the existing land and
building.
The company must refrain from incurring capital expenditure for the above mentioned
purposes as it will not be given any exemption for the same. Barring the above purposes all
other capital expenditure made by the company will be allowable as exemption if they are
incurred for the purpose of business and business only14.
In order to improve the understandability of the implication of the expenditure incurred
by the company for the purpose of scientific research the TR 92/2 has efficiently divided
them into four categories:
1) Amount that is contributed to approved research institute for carrying out scientific
research activities on behalf of the company.
2) All sorts of capital expenditures incurred by the company in order to carry out the
research activities by the company
3) The amounts spend on acquiring plant so that the same can be utilised in carrying out
the research activities.
4) The expenditure in respect of purchasing land and building for the purpose of carrying
out research activities
14 Olubunmi, Olanipekun Ayokunle, Paul Bo Xia, and Martin Skitmore. "Green building
incentives: A review." Renewable and Sustainable Energy Reviews 59 (2016): 1611-1621.

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Though the classification made by TR 92/2 comprise of four categories, it deals with only
the first two i.e. amount contributed to research institutes and the capital expenditure incurred
by the company in carrying out the research activities.
The deduction discussed above is given to the companies to instil in them the principle of
research and development in order to improve the existing products or to bring in new
products in the market15.
However the deductions are made available to the entities only to the extent they are
incurred for the purpose of gaining business profits out of them. The companies in order to
enjoy the tax incentives given by or laid down by the statute must not violate the very
purpose for which they have been given out to them. The government of any country loses
significant amount of tax revenue in form of similar tax incentives. The companies must
understand that it is their duty to give something in return to the government and the society.
The statute gives out incentives so that it can reap the benefits of the new products and the
added advantage they bring in with them in the society. In abiding by the conditions and
regulations not only does the companies enjoy significant profits in the long run but also the
society in which they are conducting their business activities gains a lot.
The benefits of the tax incentives or the implication of the incentives laid down in the
statute are immense both in the context of business and social welfare. It helps in increasing
15 Larédo, Philippe, Christian Köhler, and Christian Rammer. "The impact of fiscal incentives
for R&D." Handbook of Innovation Policy Impact, Edward Elgar, Cheltenham and
Northampton (2016): 18-53.

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the profitability, accountability and efficiency of the business entity availing the tax
incentives16.
Conclusion
Form the above discussions it can be very confidently concluded that the tax
incentives provided by the section 73 A and TR 92/2 to the companies in respect of scientific
research activities carried out by them has greatly and positively affected their business. It
has significantly motivated them to improve their business performance and operating
efficiency by researching and developing improved way of doing business. These kinds of
incentives can only bring good to the companies and the society at large. Hence such
incentives are a welcome move from the statute.
16 Timilsina, Govinda R., and Kalim U. Shah. "Filling the gaps: Policy supports and
interventions for scaling up renewable energy development in Small Island Developing
States." Energy Policy 98 (2016): 653-662.

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Reference
Barteková, Eva, and René Kemp. "National strategies for securing a stable supply of rare
earths in different world regions." Resources Policy 49 (2016): 153-164.
Bösenberg, Simon, and Peter H. Egger. "R&D tax incentives and the emergence and trade of
ideas." Economic Policy 32, no. 89 (2017): 39-80.
De Silva, P. N. K., S. J. R. Simons, and P. Stevens. "Economic impact analysis of natural gas
development and the policy implications." Energy Policy 88 (2016): 639-651.
Duncan, Greg J., Katherine Magnuson, and Elizabeth Votruba-Drzal. "Boosting family
income to promote child development." The Future of Children 24, no. 1 (2014): 99-120.
Grubert, Harry, and Rosanne Altshuler. "Shifting the Burden of taxation from the Corporate
to the perSonal level and getting the Corporate tax rate down to 15 perCent." (2016).
Hilber, Christian AL. "UK Housing and Planning Policies: the evidence from economic
research." (2015).
Kamal, Sristi, Małgorzata Grodzińska-Jurczak, and Gregory Brown. "Conservation on private
land: a review of global strategies with a proposed classification system." Journal of
Environmental Planning and Management 58, no. 4 (2015): 576-597.
Larédo, Philippe, Christian Köhler, and Christian Rammer. "The impact of fiscal incentives
for R&D." Handbook of Innovation Policy Impact, Edward Elgar, Cheltenham and
Northampton (2016): 18-53.

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Olubunmi, Olanipekun Ayokunle, Paul Bo Xia, and Martin Skitmore. "Green building
incentives: A review." Renewable and Sustainable Energy Reviews 59 (2016): 1611-1621.
Richardson, Grant, and Grantley Taylor. "Income shifting incentives and tax haven
utilization: Evidence from multinational US firms." The International Journal of
Accounting 50, no. 4 (2015): 458-485.
Rode, Julian, Erik Gómez-Baggethun, and Torsten Krause. "Motivation crowding by
economic incentives in conservation policy: A review of the empirical evidence." Ecological
Economics 117 (2015): 270-282.
Shen, Liyin, Bei He, Liudan Jiao, Xiangnan Song, and Xiaoling Zhang. "Research on the
development of main policy instruments for improving building energy-efficiency." Journal
of Cleaner Production 112 (2016): 1789-1803.
Swank, Duane. "Taxing choices: international competition, domestic institutions and the
transformation of corporate tax policy." Journal of European Public Policy 23, no. 4 (2016):
571-603.
Taylor, Grantley, and Grant Richardson. "Incentives for corporate tax planning and reporting:
Empirical evidence from Australia." Journal of Contemporary Accounting & Economics10,
no. 1 (2014): 1-15.
Timilsina, Govinda R., and Kalim U. Shah. "Filling the gaps: Policy supports and
interventions for scaling up renewable energy development in Small Island Developing
States." Energy Policy 98 (2016): 653-662.
Zhao, Zhen-Yu, Yu-Long Chen, and Rui-Dong Chang. "How to stimulate renewable energy
power generation effectively?–China's incentive approaches and lessons." Renewable
Energy 92 (2016): 147-156.

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