Do court vacations matter: evidence from the Bombay High Court

by Tushar Anand, Pavithra Manivannan, and Bhargavi Zaveri-Shah.

Introduction

Court vacations are often invoked as a problematic feature of the Indian judiciary. The discourse on this includes blaming court vacations for case delays, petitions to reduce the length of court vacations, and substituting them with staggered leave for judges. This discourse is characterised by the classic divide that cuts across most Indian discourse on court reforms. Lawyers and judges emphasize the importance of court vacations for overall judge productivity. Often, they perceive the criticism of court vacations as being politically motivated or as an attack on judicial integrity. Other stakeholders underscore the problems of delays and pendency, and compare the courts' calendar with that of other public organisations. In the event, neither side is able to support their argument by demonstrating the extent of delays attributable to court vacations. The puzzle on how much do court vacations actually affect case durations and disposal continues to remain unanswered. This article presents some first estimates on the impact of court vacations on these outputs.

During the vacation period, courts function with minimal capacity. This allows us to compare the functioning of a court during its vacation and non-vacation periods. Using a dataset of civil and commercial cases filed over about six years at the Bombay High Court, we evaluate the extent to which vacations at the court affected its productivity, measured in terms of case disposal rates and the lifecycle of cases.

Unsurprisingly, we find that there is a significant drop in the daily number of cases filed and disposed by the Bombay High Court during vacations, compared to the non-vacation periods of the year. However, this gap shrinks over time. Second, the fact that a case is filed during the vacation period affects its initial phases, but does not affect the duration within which it will get disposed of. In sum, while court vacations affect the initial phase of a case schedule, dispensing with court vacations will not make a significant difference to the disposal rates or the disposal duration of cases at the Bombay High Court.

Court vacations

Indian courts, such as the supreme court, high courts and district courts, and most tribunals, are scheduled to take three vacations - summer, festive, winter - each year. The summer vacation lasts for a little more than a month and the festive and winter vacations last for a little more than week. While the concept of court vacations is traceable to the colonial origins of the Indian judicial system, they eventually became a part of the rules governing the functioning of the Supreme Court and High Courts. The practice is not unique to India and is followed in several developed countries, such as the United States, Australia and Singapore.

During vacations, Indian courts function with vacation benches of judges to hear urgent matters that come up during this time, and a lower staff at the court registry. A comparison of the sitting list of judges for the Bombay High Court shows that, on a non-vacation day, 27 courtrooms are functional. On the other hand, on vacation days, not more than four courtrooms are functional. A reduced number of judges will likely affect the scheduling and eventual disposal of cases filed during vacations. A reduced registry capacity will likely affect the filing of new cases and scheduling of proceedings for existing cases. To be sure, court vacations affect not only the working hours of courts, but also the entire ecosystem around it. For instance, it is generally hard to find lawyers to appear for litigants before vacation benches during this time, further slowing down proceedings. Since these changes are endogeneous to court vacations, it is hard to isolate the impact of lower judges from that of the absence of lawyers willing to work during the vacation period, on the lifecycle of a case. Finally, what cases are construed as 'urgent' varies across judges' interpretation of urgency.

In this institutional setting, we ask the following questions to evaluate the impact of court vacations on overall case durations at the Bombay High Court:

1. Do case filings and disposals drop during vacation periods?
2. Do cases filed during court vacations take longer to get their first hearing?
3. Do cases filed during court vacations take longer to get disposed of?

Data and Methodology

We collect and analyse the data of cases involving all civil suits and commercial suits, which were filed at the Bombay High Court during the seven year period from January 2017 to December 2023 (Study Period). For each of these cases, our dataset captures information on the entire life-cycle of the case available on the respective courts' websites. This includes the date of filing, the dates on which hearings were conducted, and the date of disposal. Table 1 shows the total number of cases in our dataset and their status, that is, whether the cases were pending or disposed, at the time of data collection. We then count the number of days on which these courts were on vacation during our Study Period, using the vacation dates published on their websites. On an average, the Bombay High Court has 52 days of vacation per year and the average number of working days is 235.

Table 1: Data description

Cases
Disposed	1379
Pending	2529
Total	3908

One caveat. Our results account for select case-types (civil suits and commercial suits), as our dataset comprises such cases. Given that criminal cases or writ petitions, particularly those pertaining to questions of liberty or reliefs pre-empting State actions, have a higher element of urgency, it is possible that the findings for these case types will differ from our findings for civil and commercial cases.

Impact of court vacations on case filing and disposal

We begin by comparing the daily average number of cases filed and disposed before the Bombay High Court during the vacation and non-vacation period (Table 2). At the Bombay High Court, on an average, the number of cases filed during non-vacation days is thrice the number of cases filed during vacation days. Further, the Bombay High Court is able to dispose four times the number of cases on non-vacation days, compared to the vacation days.

Table 2: Average number of cases filed and disposed per day

	Vacation days	Non-vacation days
Cases filed	0.67	2.23
Cases disposed of	0.21	0.88

We examine whether the difference between the number of cases filed during vacation and non-vacation periods or between the number of cases disposed of during these two periods, is statistically significant. The standard t-test and z-test used for determining statistical significance assume a normal distribution of the underlying data. However, our data is not amenable to this test for two reasons. One, the number of observed cases in non-vacation period is five times than that in the vacation period. Second, the distribution of the per day number of cases filed and disposed of is right-biased, with a long tail. We used a two-sample Kolmogorov-Smirnov test to confirm that the two samples come from different distributions. In the absence of the standard tests (t-test and z-test), we use a bootstrapped sampling method to estimate the statistical significance of the difference in means of the two sets (vacation and non-vacation) of our data. This method allows us to create a normal distribution of the data by repeatedly drawing random samples from each of the two sets. This approach shows that the difference in means for the number of cases filed and disposed during vacation and non-vacation days is statistically significant at the five percent level.

At first glance, these findings might suggest that had the court not been on vacation, case disposals would have increased by a factor of four. However, this disposal rate is likely not linear. For instance, a quarter-wise analysis of cases filed and disposed of shows that these differences reduce (Table 3). That is, the difference in the number of filings and disposals in Quarters 2 and 4 that are affected by vacation days (Apr-Jun and Oct-Dec) and Quarters 1 and 3 that are not affected by vacation days (Jan-Mar and Jul-Sep), are much smaller.

Table 3: Quarter-wise average of cases filed and disposed

	Q1	Q2*	Q3	Q4*
Cases filed	162.57	128.29	134.86	132.58
Cases disposed of	51.29	38.71	58.43	46.00

^{*Denotes quarters affected by vacation days.}

Impact of vacations on case timelines

The analysis in the previous section would reflect the impact of court vacation on the overall productivity of the court. However, what is the impact of court vacations for an individual litigant? In this section, we examine whether the timelines for important milestones in a case vary for a litigant who filed her case during the vacation period, compared to a litigant who filed her case during the non-vacation days.

We estimate the time taken for cases to be scheduled for its first hearing and time taken for them to be disposed of. These estimations are made using the survival analysis approach used by Manivannan et al, 2023. This approach is a useful measure of individual case life cycles. It shows the likelihood of a case awaiting an important milestone, such as a first hearing or disposal, at different points in time.

Table 4: Probability of first hearing

	Vacation days	Non-vacation days
1 month	6.47%	7.24%
3 months	25.10%	23.35%
6 months	49.39%	47.20%

Table 4 shows the probability of a case getting its first hearing within one month, three months and six months of filing. The table compares these probabilities for cases filed during vacation days and non-vacation days. The probability of a case filed during the non-vacation period getting its first hearing within one month of filing is only slightly higher than the corresponding probability of a case filed during the non-vacation period. As time progresses, this difference disappears. In fact, after the first month of filing, cases filed during the vacation period have a marginally higher probability of getting their first hearing than cases filed during the non-vacation period. In sum, our analysis suggests that the "vacation effect" on case scheduling persists for not more than a month.

Similarly, we estimate the probability of a case getting disposed of within one to two years of its filing. Table 5 compares these probabilities for cases filed during vacation days and non-vacation days. At the Bombay High Court, there is about 5-6% higher disposal probability for cases filed during the non-vacation days. Overall, the "vacation effect" is marginal and temporary, and does not seem to affect the case duration for a litigant.

Table 5: Probability of disposal

	Cases filed on
	Vacation days	Non-vacation days
6 months	6.95%	11.03%
1 year	11.62%	17.95%
2 years	22.59%	27.11%

Conclusion

Our analysis provides the first estimates on the impact of Indian court vacations on some measurable elements of a court's functioning. Historical data from the Bombay High Court for civil and commercial cases shows that court vacations have a statistically significant impact on the number of cases filed and disposed of on a daily basis. While this finding is perhaps unsurprising, these differences disappear over time. Further, they do not substantially affect the overall duration of the case, even as they have a small effect on the initial phases of cases filed during court vacations.

A key limitation of our analysis is that it does not account for the impact, if any, of court vacations on a judge at the individual level. That is, it does not capture the possible intangible productivity gains that accrue from a holiday. It is possible, for instance, that when a judge goes on a vacation, she writes more judgements, reads more jurisprudence or returns with boosted productivity. The data available in the public domain does not allow us to measure these impacts on judge productivity. Besides, if there were such impacts on a judge, they are not a powerful explanation for a court vacation where all the judges go on vacation simultaneously. These benefits would accrue even where judges take leave as per their own convenience during the calendar year. Therefore, while measuring such impacts is important for its own sake, it does not add to the vacation-related discourse which our analysis speaks to.

Finally, several scholars have started adopting the empirical approach in evaluating Indian courts and tribunals, using a variety of tools ranging from simple summary statistics to more advanced analyses grounded in statistics, and using the tools of natural language processing and artificial intelligence. We provide yet another demonstration that questions pertaining to the impact of interventions in the Indian court system are amenable to empirical research. Expanding such analyses to other courts will strengthen the discourse on court vacations by shifting from pure normative perspectives to empirically grounded questions on whether vacations actually increase the productivity of a court.

References

Pavithra Manivannan, Susan Thomas and Bhargavi Zaveri-Shah (2023), Helping litigants make informed choices in resolving debt disputes, The Leap Blog, 15 June 2023.

Law Commission of India (2009), Reforms in the Judiciary: Some suggestions, Report No. 230, August 2009.

Alex Tsun (2020), Chapter 9, Applications to Computing, Probability & Statistics with Applications to Computing, 2020.

Tushar Anand and Pavithra Manivannan are researchers at XKDR Forum and Bhargavi Zaveri-Shah is a doctoral candidate at the National University of Singapore. The authors thank Susan Thomas and Geetika Palta for useful discussions.

Who is "innovative"? Unpacking the process of tax exemption grants to startups

by Aneesha Chitgupi, Karthik Suresh, and Diya Uday.

When private individuals spend resources on innovation, the ideas and benefits that arise spread to society at large. An underspend on innovation results in the market failure of "positive externalities". The state has an important role to play in solving this market failure by encouraging spending on activities that generate innovation (Mashelkar et al., 2024). In India, the government did so by: (i) building research organisations like CSIR and ISRO and hiring career scientists, and (ii) providing tax exemptions. The Income Tax Act, since its inception in 1961, has exempted expenditures on scientific research. Since 1996-97, goods used for R & D have been exempt from customs and excise duties.

In the last ten years, both the Union and various state governments have perceived "startups" as major drivers of innovation. A host of incentives have been put in place for them. These include: (i) reduced fees and priority in processing patent and design applications; (ii) full exemptions on income tax for the startup following approval from an Inter-ministerial Board (IMB); (iii) priority during public procurement, etc. However, in a previous article (Chitgupi et al., 2023), we analysed Indian patent filings and grants and found that, despite enjoying government incentives, the overall share of startups in patent filings and grants --- a proxy for innovation --- remains small. Moreover, only a few startups receive income tax exemptions aimed at spurring innovation (see Table 1).

Table 1: Overview of the landscape of startups

Startups	2023	2024
Total (registered and unregistered)	2,49,107	3,14,492
Registered as startups by DPIIT*	90,939 (36.5)	1,31,191 (41.7)
Granted tax exemptions by the IMB**	1,100 (1.2)	2,976 (2.3)

Table notes: * fraction of total startups;
** fraction of DPIIT registered startups.
Source: Authors' compilation and analysis

The income tax exemption for startups

Section 80-IAC of the Income Tax Act allows a one hundred per cent tax deduction for eligible startups. The aim is to reduce the tax and compliance burden in the initial years of incorporation. A startup is eligible if (i) it is a new business incorporated after 1 April 2016 and is not a reorganisation of an old business with old machinery; (ii) its total turnover does not exceed INR 100 crores; and (iii) it is "engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation". The body tasked with determining the eligibility of a startup is the IMB. It was set up by the DPIIT in April 2016 with three members, and it is an executive body with delegated powers.

In this article, we study the institutional design and functioning of the IMB under Section 80-IAC. Our findings suggest that the IMB's process is not optimised to deliver the statutory intent of tax exemptions to startups. We identify the bottlenecks that must be targeted for change and question the current incentive structure for startups to innovate.

Methodology

There is a perception that staffing an organisation with technocrats will solve the problems of the organisation. This is not a recipe for lasting success (Kelkar and Shah, 2022). It is instead important to draft rules and procedures that work within and beyond the administrative system and that provide the right incentives to bolster the purpose of the organisation, i.e., promoting innovation. We view the IMB as an executive body tasked with an executive function --- to determine whether a startup is eligible for an exemption under Section 80-IAC. We rely on principles of administrative law while examining the processes and workings of the IMB. In particular, we focus on (i) institutional design, (ii) transparency, (iii) administrative discretion, and (iv) accountability (see Table 2).

We integrate this framework with Adam Smith's Canons of Taxation which sets out design principles for efficient tax administration. These are: (i) the maxim of equality, i.e., the tax must be collected with equality before the law; (ii) the maxim of certainty, i.e., the time, manner, and amount of tax to be paid ought to be clear and plain to the taxpayer, (iii) the maxim of convenience, i.e., the tax ought to be levied at the time and in the manner in which it is most likely to be convenient for the taxpayer and (iv) the maxim of economy, i.e., the tax ought to be so contrived that it takes from the taxpayer as little as possible. Smith's canons are routinely used by Indian courts to test the constitutionality of actions by tax administrations. For example, in South Indian Bank Ltd. vs. CIT AIR 2021 SC 4266, the Supreme Court applied Adam Smith's canons to examine the tax exemption to income arising from interest paid by banks.

Table 2: Our framework for analysing the process of tax exemptions to startups

Parameter	Administrative principle	Smith's canons
Institution design	Clarity of purpose and process	Equality, certainty, convenience.
	Composition of the board
	Reporting of conflicts of interest
Process transparency	Publication of rules and processes	Certainty
Administrative discretion	Issue of reasoned orders	Equality, certainty
Administrative accountability	Procedure for appeals from orders	Equality, certainty
	Audit oversight mechanism

We hand-collected and evaluated a sample of the minutes of the IMB meetings published on the Startup India portal to determine the eligibility of startups for tax exemptions. Our dataset comprises 52 decision documents out of the 72 available on the portal from 2016 to 2023, with the most recent document being from February 2023. There have been no additions to the IMB decisions since February 2023. Table 3 summarises our sample and provides insights into the total number of cases heard and the corresponding board decisions, forming the foundation of our study. Of the 72 IMB decisions published on the IMB website from May 2016 to February 2023, we have hand-collected data from 52 of these meetings, covering a total of 2,102 cases (72.2 per cent) each representing a startup.

Table 3: Overview of the sample data of IMB meetings

Year	No. of meetings*		No. of startup applications
		Granted	Rejected	Deferred	Total
2016	6	9	265	35	309
2017	3	21	201	141	363
2018	3	6	126	17	149
2019	8	109	1	57	167
2020	8	73	10	15	98
2021	10	80	13	9	102
2022	13	651	97	52	800
2023	1	112	2	0	114
Total	52	1061	715	326	2102

Table notes: *No of meetings from which data was used for this article.
Source: Authors' compilation from the Startup India website.

Results

Institution design

Clarity of purpose and process: The IMB has to decide whether a startup is eligible for the tax exemption. We find that the substance of the criteria to be applied by the IMB to determine eligibility for startup tax exemptions overlaps with the DPIIT criteria to register a startup. The need for a body like the IMB to reassess a startup on the same criteria is unclear. Despite this, only a small percentage of firms that have qualified the DPIIT's criteria meet the IMB's criteria. This violates Smith's canons of certainty and convenience because of the uncertainty of receiving the exemption despite having met the DPIIT's criteria. Table 4 compares the criteria for the IMB and the DPIIT to determine the eligibility of a startup for registration and grant of tax exemption. The criteria are substantially the same.

Table 4: Mandate of the IMB compared with the mandate of DPIIT for startups

	IMB (for startup tax exemption)	DPIIT (for startup registration)
Criteria 1	The entity's business involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property	Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Criteria 2	The entity was incorporated on or after 1 April 2016 but before 1 April 2025.	Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under Section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
Criteria 3	The entity's turnover does not exceed one hundred crore rupees.	Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
Criteria 4	The entity has not been formed by splitting up, or the reconstruction, or using more than 20% by value of machinery, of a business already in existence.	The entity shall not be formed by the splitting up or the reconstruction of an existing business

Source: DPIIT notification dated 19 February 2019 and Section 80 IAC of the Income Tax Act 1961

This is further highlighted through our analysis of the reasons for rejection of exemption claims. We map the reasons that are recorded in the minutes of IMB's meetings to the eligibility criteria set out in Table 4. We find that in 65 per cent of cases, a startup fails to get an IT exemption from IMB despite having met the same criteria for the DPIIT's requirement. Table 5 presents the percentage of exemption applications rejected based on previously assessed criteria. Further, 51 per cent of cases were rejected because the IMB determined that the startup was incorporated before 1st April 2016. At the outset, this is an objective criterion that the DPIIT and IMB should be able to agree on. Further, the cases in the Others category, which make up nearly 15 per cent of rejections, comprise criteria not specified under the law, such as shareholding patterns or other reasons said to be privately communicated to the startup.

Table 5: Overview of the reasons for rejection of applications for the IT exemption

	Reasons for rejection	No. of rejections	Rejections as a fraction of total rejections (where reasons are given) (%)
Criteria 1	Lack of innovation, scope of scalability, and wealth generation	91	12.7
Criteria 2	Incorporated before April 2016	366	51.2
Criteria 3	Turnover exceeds hundred crore rupees	0	0
Criteria 4	Reconstruction of existing business	12	1.7
	Others*	105	14.7
	Rejection without reasons	141	19.7
	Total	715	100

Table notes: * "Others" includes reasons not part of Criteria 1 to 4 in Table 4 above.
Source: Authors' compilation and analysis

Composition of the board: It is not apparent how the composition of the IMB is relevant for the purpose of the IMB. Since its constitution, the IMB has had a Joint Secretary from the Department for Promotion of Industry and Internal Trade (DPIIT), a scientist from the Department of Science and Technology, and a scientist from the Department of Biotechnology. For a year, between 2018 and 2019, the IMB also included representatives from SEBI, RBI, the Ministry of Corporate Affairs, the Ministry of Electronics and IT, and the Central Board of Direct Taxes. The IMB also has a "technical consultant". This consultant is an employee of the National Research Development Corporation (NRDC), a public sector undertaking owned by the Government of India. We are unable to find documentation that highlights the selection process and requisite qualifications of these members. All of them are ex-officio members. The role of the NRDC consultant has also not been clearly defined.

Process transparency

Publication of rules and processes: The rules or guidelines on the IMB's processes are not available in the public domain. For example, there are no guidelines on the basis of which the most important phrase in section 80-IAC, "innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property" is determined. The lack of guidelines also violates Smith's canons of certainty and convenience. Guidelines are necessary for predictability for firms and greater accountability from the government. Other departments of the Indian government that carry out similar certification processes, such as the Department of Scientific and Industrial Research which certifies whether an applicant qualifies for tax exemptions for scientific research and R & D under Section 35(2AB) of the IT Act, have prescribed guidelines that companies can use to evaluate their chances of success.

Administrative discretion

Issue of reasoned orders: A central tenet of administrative law is that an order that carries negative consequences for an assessment should be well-reasoned. Unfortunately, non-speaking orders are frequently issued by Indian tax administrations (example, example). We do not have access to the text of the orders that are issued to individual applicants, so it is unclear whether detailed reasons are provided by the IMB while rejecting applications. However, from the minutes of the IMB meetings, we note that many companies are not provided with adequate and specific reasons for why their applications were rejected. This violates Smith's canons of certainty and equality. All deferred or rejected cases must be provided with reasons for their deferment or rejection. Published decisions help other startups better understand and comply with the eligibility criteria.

Figure 1 demonstrates whether the IMB communicated the reasons for the decisions taken on granting or rejecting the IT exemption for startups. We find that not all decisions are published with reasons. Even where applications are rejected, we do not see reasons being provided in every case. Of the 715 startups that were rejected, 19.7 per cent (141 startups) were not given reasons for rejection by the IMB. We further find that of the total 2,102 cases (Table 3) in our sample, deferred cases accounted for 15.5 per cent of them. Nearly 38.7 per cent of such cases were deferred without providing any reasons. Among the 1,061 startups granted the tax exemption, 67.9 per cent were granted without reasons being published. This creates ambiguity. In 15 per cent of cases, the IMB rejected applications for reasons other than those stated in the law (Tables 4 and 5).

Figure 1: Reason provided by application status across IMB decisions as a share of total cases

Figure 2, presents the share of cases where reasons were published across the decisions taken (whether granted, rejected, or deferred) by IMB from 2016 to 2023 across 52 decision documents. Since its inception, the IMB has published reasons for the majority of its decisions --- 67.3 per cent, 61.2 per cent and 73.2 per cent for 2016, 2017, and 2018, respectively. Across the years 2019, 2020, and 2021, IMB published reasons for all of its decisions. However, in 2022 and 2023, IMB published reasons for only 25.7 per cent and 1.8 per cent of decisions, respectively.

Figure 2: Reasons provided by year as a share of total cases

One may argue that since 2019, the IMB decision in favour of grants has increased from 65 per cent in 2019 to 98 per cent by 2023 and that the lack of reasons provided for the grant of IT exemption is not a major administrative challenge. We believe this has happened as the scheme gained maturity and there was a rise in the number of startups incorporated after 2016 that are applying for exemption under Section 80-IAC. It is important to note here that the cases brought to the IMB are recognised as startups by DPIIT, which follow similar criteria for establishing an entity as a startup with differences in the incorporation date, which is restricted to 'after April 2016' for IMB classification. This has been the major reason for rejections in the early years of the scheme (Table 5).

Administrative accountability

Procedure for appeals from orders: The right to appeal is another core tenet of administrative law. Judicial review of an administrative action ensures the lack of arbitrariness and improves administrative accountability. The IMB does not appear to have an appellate or review mechanism. It is unclear whether the decision of the IMB, not being one taken by the Income Tax Department, is appealable under the Income Tax Act. Moreover, this contravenes Smith's canon of equality. Startups that are aggrieved with the IMB's decision have to directly approach the High Court under a writ petition (example from Delhi HC). A case should lie before the High Court only if it involves a substantial question of law (Datta et al., 2017). This is because it is inefficient and costly to bring routine cases such as challenges to IMB's exemption decisions that do not involve a substantial question of law. This only adds further strain on the high courts' already burdened docket.

Audit oversight mechanism: The IMB is subject to audits by the CAG. However, no such audit of its functions has been carried out so far.

Discussion

Our findings indicate that the 80 IAC tax exemption is not working as desired. There are some core challenges in both the design of the exemption and its implementation.

Substantive challenges: The eligibility criteria to become a startup recognised by DPIIT and the eligibility criteria to be granted a tax exemption by the IMB are substantially the same (Table 4). However, startups are being granted recognition by the DPIIT but are being rejected for the tax exemption on the very same criteria by the IMB. If the criteria are substantially the same, a registered startup must automatically gain a tax exemption grant by virtue of qualifying as a startup by DPIIT. It is unclear why a separate application must be made involving both cost and time. Further, conversations with startup founders revealed that the 80-IAC exemption is not the impetus they need to spur innovation.

Implementation challenges: A key challenge is that rules and process guidelines on the grant of the IT exemptions are not available in the public domain. This has two drawbacks: (i) a startup applying for the exemption will not have a full picture of the process, and (ii) it allows room for administrative discretion, reducing the predictability of the outcomes of the applications. Further, the IMB does not publish reasons for rejection of applications consistently. This is imperative, as it will bring about transparency in the working of the IMB and also give potential applicants a sense of the reasons for rejection, acceptance, or deferment. The IMB process must also have a published procedure for appeals. Lastly, the composition of the IMB must be commensurate with its purpose. It is unclear why, for example, SEBI and RBI officers were part of the panel to determine "innovation". Our findings are in line with the recent observations of the Parliamentary Standing Committee on Commerce on the lack of clarity in the process for granting these exemptions. In response, DPITT has proposed to take steps to make the process of granting tax exemptions more "transparent" and "user-friendly".

Alternative strategies to encourage innovation

Building better supply-side incentives: Supply-side incentives are effective strategies to encourage spending on innovation. Tax exemptions could be one way forward, but not in their current form. We compared the Indian scenario to other countries to get some guidance. We find that while tax incentives are common for startups in many countries, and are the recommended way forward, the mechanism by which they are granted is different from the IMB. In the United Kingdom, "knowledge-intensive" companies can avail of tax benefits. Whether a company is knowledge-intensive or not is determined by HM Treasury under Section 252A of the Finance (No. 2) Act, 2015. The provision defines a "knowledge-intensive" company as one that: (i) spent at least 15 per cent of OpEx on research and development or innovation in at least one of the previous 3 years, or spent 10 per cent of OpEx in each of the previous 3 years, and (ii) is either likely to exploit intellectual property that it has created in the previous 3 years, or at least 20 per cent of the company's full-time employees (FTEs) are engaged in research and development or innovation. These FTEs must have at least a masters' degree. In Ireland, under Section 496 of the Taxes Consolidation Act, 1997 there is a negative list of industrial sectors and companies that do not qualify for the Startup Relief for Entrepreneurs (SURE) scheme if their main activities of business are in the specified sectors. Companies self-certify their applicability for the scheme, and there are stiff penalties in case they misinform the Revenue department. In Germany, the INVEST scheme of the Federal Ministry of Economic Affairs and Climate Action mentions that companies must (i) either hold a patent issued to them in any of the EU member states in the previous 15 years, or (ii) must be "innovative". "Innovation" is proved in a manner opposite of the Irish method, i.e. the company demonstrates that it is in fact working in the specified sector. The German Federal Tax Office may carry out random checks on whether a company is "innovative" by hiring an audit firm to independently assess whether it is truly generating output in its stated sector.

In all these countries, the government does not enter into the question of which firm is "innovative". The main reason for this is the difficulty in determining who is "innovative". Instead, countries identify priority sectors and grant incentives to all startups within the sector. That aside, in the Indian context, given the significant overlaps between the eligibility criteria for being a registered startup vis-a-vis the eligibility criteria for tax exemptions by registered startups, the government may consider a single window clearance system in which an eligible startup is registered and then is automatically given a tax-exempt status on account of being registered with the DPIIT. In doing so, the state will free up valuable state resources and capacity, which may be deployed for other purposes aligned with the intention of promoting innovation among startups.

Demand-side interventions through government contracting: As an alternative, some literature suggests that demand side strategies through public procurement will encourage innovation (Rothwell et al. 1981).

While the creation of the IMB and the government's focus on startups appears to be in response to a market failure, the design of the intervention has flaws. We note that "startups" are not necessarily major drivers of innovation in India. Firm size has no role to play in how innovative it can be. Therefore, tax exemptions for startups, even if they are "innovative", have little measurable effect on innovation in Indian society as a whole. Mashelkar et al (2024) recommend that the government "buy" i.e. contract out more research and innovation functions to firms in the private sector. The spillovers this can generate would be substantive and would have a multiplier effect. We already have many examples of the government choosing to do so e.g. the New Millennium Indian Technology Leadership Initiative (NMITLI) program of the Council for Scientific and Industrial Research (CSIR), Department of Space's (DoS) contracting with companies like L & T and Tata Elxsi to build rocket engines and recovery modules for the all-important Chandrayaan and Gaganyaan missions. These kinds of contracts should be done more often and frequently with all kinds of companies to build innovation and production capacity. Our recommendation in all cases is to pursue innovation by contracting out.

References

1. Adam Smith, The wealth of nations, Fingerprint Classics, 2024.
2. Aneesha Chitgupi, Karthik Suresh and Diya Uday, Are startups engaging in innovation in India?, The Leap Blog, 25 April 2023.
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Aneesha Chitgupi, Diya Uday and Karthik Suresh are researchers at XKDR Forum. The authors thank Ajay Shah and two anonymous referees for their comments and inputs.