Karnataka’s legal position on regulatory sand-boxing. Karnataka is one of the few Indian states (besides Telangana and Maharashtra) that can legitimately claim to have thought ahead on innovation regulation. In 2020, it enacted the Karnataka Innovation Authority Act, a law that enables the creation of regulatory sandboxes, controlled environments where new technologies and business models can be tested without being immediately strangled by regulation.
Regulatory sandboxes are meant to solve a familiar policy problem: how do governments respond to fast-moving innovation without either over-regulating it or looking the other way? By allowing limited experimentation under regulatory supervision, sandboxes offer a middle path – learning by doing.
Yet, almost five years on, Karnataka’s sandbox regime has remained largely theoretical. Despite the law and subsequent rules, no sandbox appears to have been actually operationalised. Now, as the state considers amendments to the Act, there is a rare opportunity to move beyond fine-tuning legal language and instead ask a more fundamental question: what kind of innovation do we actually want to enable?
This question matters because India’s innovation policy has, for the most part, been framed around startups, markets, and scale – but not necessarily around social impact.
The case for social impact innovations served by regulatory sand-boxing. Globally, regulatory sandboxes have been used to pilot fintech products, health technologies, mobility solutions, and data governance frameworks. In India too, the sandbox conversation has largely revolved around easing compliance for new businesses and emerging technologies. What is often missing is a deliberate focus on social purpose innovation i.e enterprises that use technology to solve population-scale problems in health, disability inclusion, education, livelihoods, or access to justice.
Many of these innovations do not sit comfortably within India’s existing legal and fiscal frameworks. They are often for-profit or hybrid entities, even though their primary objective is social impact rather than profit maximisation. And this is where the system begins to break down.
Regulatory challenges facing funding social impact innovation. Under the Income Tax Act, charitable organisations face strict limits on funding or supporting for-profit entities, regardless of the social value those entities create. CSR law operates in a similar fashion. As a result, philanthropic funders and CSR contributors are often legally barred from supporting precisely the kinds of innovations that could improve health outcomes, enable inclusion of persons with disabilities, or enhance incomes for low-income groups – simply because those innovations take a for-profit form.
This creates a perverse outcome. A low-impact charitable programme may be fully fundable, while a scalable, technology-enabled solution that demonstrably improves lives may not be. Venture philanthropists and impact-oriented funders find themselves navigating regulatory ambiguity, unsure whether supporting such innovations could expose them to compliance risks.
There has been some movement in acknowledging this gap. The Social Stock Exchange, for instance, recognises “social purpose enterprises” and accepts that social impact and revenue generation are not mutually exclusive. But this recognition remains largely symbolic unless it is backed by regulatory and fiscal flexibility.
This is where Karnataka’s regulatory sandbox framework could do something genuinely innovative.
The emerging opportunity. If sandboxes are designed only as technical testing grounds, their impact will be limited. But if the upcoming amendments explicitly recognise social purpose innovation, sandboxes could become a bridge between innovation policy and social policy.
Consider what this could look like in practice. An assistive technology enterprise piloting tools for persons with disabilities could be allowed to test solutions without immediately triggering compliance frameworks designed for large commercial platforms. A health-tech startup serving low-income populations could receive temporary regulatory or tax relaxations while outcomes are evaluated. A data-driven service delivery model could be tested with built-in safeguards rather than being blocked by regulatory uncertainty.
Most importantly, sandboxes could allow policymakers to experiment with how such innovations are treated from a taxation and charitable perspective. If an enterprise demonstrably advances public welfare – by improving access, inclusion, or livelihoods – should funding it automatically be treated as non-charitable? Or could a sandbox allow temporary recognition of such activities as eligible for philanthropic or CSR support, subject to transparency and accountability?
This would not mean lowering regulatory standards. On the contrary, it would allow regulators to learn what works, what fails, and what safeguards are necessary – before making permanent policy choices. It would also send a clear signal to funders and innovators that the state is serious about enabling technology that serves the public good.
The proposed amendments to the Karnataka Innovation Act and Rules offer a chance to move from symbolic innovation policy to meaningful impact. Recognising social purpose innovation within regulatory sandboxes, and aligning regulatory and fiscal treatment accordingly, would be a powerful step in that direction. If Karnataka gets this right, it could set a precedent for how India thinks about regulation, innovation, and social good.
Disclaimer
Views expressed above are the author’s own.
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