The creation of intellectual property and trade secrets has been a significant factor in India’s steady strengthening of its innovation ecosystem, with the nation climbing to 38th position in the Global Innovation Index (GII) in 2025, reflecting a substantial improvement from its previous position at 66th rank in 2019. This growth has been attributed to India’s improving global standing in innovation outcomes, including manufacturing capacity across the tech and semiconductor industries, which is expected to have a positive impact on the country’s tax landscape, particularly in relation to incentives and deductions available under various tax laws, including the Income Tax Act, 1961, and the Goods and Services Tax (GST) Act, 2017.
Key Facts
- The Economic Survey 2025-26 highlights India’s improving global standing in innovation outcomes, including manufacturing capacity across the tech and semiconductor industries.
- India has climbed to 38th position in the Global Innovation Index (GII) in 2025, up from 66th rank in 2019.
- The Production Linked Incentive (PLI) scheme has encouraged major global firms to relocate and expand production in India, with actual investments exceeding ₹2 lakh crore as of September 2025.
- The semiconductor sector has seen significant progress, with ten semiconductor manufacturing and packaging projects approved across six states, with a cumulative investment of around ₹1.60 lakh crore as of August 2025.
- The government has announced a Research, Development and Innovation (RDI) Fund with an outlay of ₹1 lakh crore over six years, alongside the establishment of the Anusandhan National Research Foundation.
Statutory Context & Tax Analysis
The improvement in India’s innovation ecosystem is expected to have a positive impact on the country’s tax landscape, particularly in relation to incentives and deductions available under various tax laws. For instance, Section 35(2AB) of the Income Tax Act, 1961, provides for a deduction of 150% of the expenditure incurred on scientific research, which can be availed by companies engaged in research and development activities. Similarly, Section 80-IAC of the Income Tax Act, 1961, provides for a deduction of 100% of the profits and gains derived from the business of manufacturing or producing any article or thing, which can be availed by startups engaged in innovation and research. Furthermore, the GST Act, 2017, provides for exemptions and concessions on various goods and services used in the research and development sector, such as exemptions on scientific and technical instruments, and concessions on services provided by research institutions. The GST Council, constituted under Article 279A of the Constitution of India, has the power to make recommendations on GST rates and exemptions, which can have a significant impact on the research and development sector.
Client Impact & Compliance Procedure
The improvement in India’s innovation ecosystem is expected to have a positive impact on businesses engaged in research and development activities, particularly startups and companies engaged in the tech and semiconductor industries. To avail of the incentives and deductions available under various tax laws, businesses must ensure that they maintain proper records and documentation, including records of expenditure incurred on research and development, and profits and gains derived from the business of manufacturing or producing any article or thing. Businesses must also ensure that they file their tax returns and GST returns on time, and claim the deductions and exemptions available to them. The following steps can be taken by businesses to ensure compliance:
- Maintain proper records and documentation of expenditure incurred on research and development.
- File tax returns and GST returns on time, and claim the deductions and exemptions available.
- Ensure that the business is registered under the GST Act, 2017, and has obtained the necessary GSTIN.
- Ensure that the business is registered under the Income Tax Act, 1961, and has obtained the necessary PAN.
- Claim the deduction under Section 35(2AB) of the Income Tax Act, 1961, by filing Form 3CA and Form 3CD.
- Claim the deduction under Section 80-IAC of the Income Tax Act, 1961, by filing Form 3CA and Form 3CD.
- Avail of exemptions and concessions on goods and services used in the research and development sector, by filing the necessary GST returns and claiming the exemptions and concessions available.
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