Budget 2014: Expectations from the pharmaceutical & healthcare Industry
Partner Life Sciences Practice, EY
Senior Tax Professional, EY
With the ushering-in of the strongest non-Congress Government, the climate is ideal for the new administration to make stronger and fundamental changes to provide greater impetus to the Indian economy. In this regard, there can be little resistance to the fact that the pharmaceutical sector is poised to play a key role in fuelling and aiding the growth.
Over the decades, India has witnessed a categorical shift with regard to urbanization and disease patterns; this coupled with increased investments have led to Indian pharma industry's escalating prominence.
However, past few Budgets have largely seen increased budgetary allocations for healthcare schemes, with little for pharmaceutical and healthcare companies.
Listed below are certain expectations which the Finance Minister and his army may want to reform through the Budget:
Incentives for expenditure incurred with regard to R&D activities
The constantly evolving environment in the sector makes it imperative to provide impetus to its R&D activities. While under the current provisions, section 35(2AB) provides a deduction for inhouse R&D expenses, there are no specific tax benefits for contracted R&D or undertaking R&D for group companies. Hence, while India is an environmentally conducive destination to outsource R&D activities - with an inherently advantageous availability of high skilled labour, it is an industry-wide perception that the policy is not entirely flexible to provide impetus to R&D. Through the Budget the Government should look at providing a deduction on all R&D activities enabling greater flexibility in claiming a deduction. Further, the scope of the inhouse R&D expenses should be extended to cover significant expenditure incurred on consulting / legal fees for filings in USA for NCE (new chemicals entities) and ANDA (abbreviated new drug applications, preparations of dossiers, etc. for defending patent rights.
Expenditure on freebies to doctors
As a tool for educating, creating awareness of new medicines/ technologies among the doctors, pharmaceutical companies reach out to doctors by providing sponsorships, grants, etc. Medical Council of India had prescribed regulations for certain activities which are not permissible to be undertaken by healthcare practitioners. In view of the circular issued by the Central Board of Direct Taxes considering expenditure incurred on such non-permissible activities to be in violation of law, tax officers deny deduction on ad-hoc basis. The circular is vague on the scope of expenses and manner of administration which leaves the tax officers to sit in judgement on matters to which their expertise does not extend, then leading to unnecessary litigation. In this regard, Government can rationalize the provisions by providing for claim of expenditure on a self-certification basis or on the basis of specified documents such as CA certificate in hassle free manner.
Rolling out GST provisions
Rolling out the long pending GST provisions would be sure to bring cheer in the form of reduction in prices as transactions would be devoid of cascading effect of taxes. Further, the provisions will provide greater clarity and comfort coupled with much required certainty for those running business houses in the sector.
Increase in tax holiday period for setting up a hospital
The current provisions allow hospitals a tax holiday for a 5 year period which basis industry prudence seems insufficient- considering that setting up involves a huge capital outlay and breakeven takes about 5 years. Further, hospitals set up in metros are not allowed the benefit. In this regard, the Budget must look to provide a 10 year tax holiday period as well as extending the benefit to hospitals set up in metros further enabling promotion of medical tourism.
The Tax Laws in India prescribe a rate of depreciation of 15% for medical/ surgical/ pathological equipment estimating it to have a life of 15 years which is unrealistic. The Budget should target to increase this rate to 60% to encourage upgradation to latest technologies and to further incentivize investment
Clarifications on margin requirement regulations
Companies involved in import of products from related parties like Active Pharmaceutical Ingredients (APIs)/Finished Drug Formulations have to comply with Transfer Pricing provisions by maintaining higher margins/ lower import prices while Customs (Special Valuation Branch) regulations demand higher import prices. Accordingly, there is a dire need for clarifications in order to harmonize the same
Greater abatement for excise medicaments
In 2008, a 35% abatement rate for medicaments was introduced; however, this doesn't seem sufficient taking industry costs into account. A rate of 40-50% seems to be a far more digestible rate.
Reduction of customs duty on life saving drugs and related medical devices
Higher rates of customs on life saving drugs, medical devices, diagnostic equipment, etc. have made them less affordable and bringing rates down would have the impact of greater affordability of drugs and of treating serious ailments.
No provisions for claim of refund on underutilization of CENVAT
Credit API attracts excise at 12.36% allowing CENVAT credit on the entire amount. However, output attracts tax at 6.18%, leaving the differential as a cost to the manufacturer. The Government should introduce provisions to allow refund on the differential or rationalizing the duty structure. Increase in deduction for medical expenses for individuals The current provisions allow individuals a deduction on reimbursement of medical expenses actually incurred upto Rs 15,000. Taking into account inflation and increased cost of living, it seems only fair to increase the same to Rs 50,000.
To conclude, there is little doubt in the potential of the Indian pharmaceutical and healthcare industry to contribute to national growth and its need for quicker, smoother and clearer policy not just on tax but on regulatory front as well. Hence, it would be interesting see what think tank in the administration has in store for the sector through the Budget.