India's industrial protection and promotion policies for small-scale enterprises have figured
prominently in the literature on industrialization policies in developing countries. These size dependent
tax incentives could encourage fragmentation of production and prevent natural up-scaling of firm
sizes. The author presents a new empirical application of the idea of threshold burden of tax incentives
in India. The study is based on a large unbalanced panel of manufacturing factories in the formal sector
spanning the period 1999-2008 and a panel of manufacturing companies covering the period
1990-2010. Average subcontracting intensity was found to be significantly higher in manufacturing
factories and firms with sales turnover below the ceiling level set by the tax rules. Econometric tests
based on Fixed Effect models supported the hypothesis that firms take advantage of tax incentives by
staying below the threshold sales turnover. This is consistent with the idea of threshold effects of size
dependent tax incentives.