This budget would be the last full-fledged budget of the Narendra Modi-led government before 2019 elections and like other sectors, Indian pharma industry too has high hopes from this government. Industry stakeholders share their expectations
Weighted deduction on R&D should be continued
Here are some of the key expectations from a pharma/ healthcare personal tax standpoint:
Increase in tax-free medical expenditure reimbursement from employer to employee: The current limit of Rs 15,000 per annum (pa) of tax free reimbursements for medical expenditure from employee to employer was last revised almost two decades back (i.e. in 1998). With significant increase in healthcare costs this limit may be considered to be atleast doubled to Rs 30,000 pa.
Deduction for medical expenditure: Currently deduction for medical expenditure incurred is restricted to Rs 30,000 and allowed only where such expenditure is incurred for very senior citizens (above 80 years of age) who do not have a health insurance policy. Considering that a large mass of Indian population have limited access to even basic healthcare facilities, this deduction may be considered to be allowed to all taxpayers where they do not have any health insurance policy. From a direct tax perspective, the following may be considered:
Weighted deduction on R&D: For a sector witnessing unprecedented pressure, not only on the export front but even locally, weighted deduction on R&D should be continued. Further, weighted deduction is allowed only on expenses incurred in a recognised in-house R&D facility. However, there are certain expenses necessitated by the industry’s business that are incurred outside this R&D facility: such as clinical trials, patent approvals, overseas trials, preparation of dossiers, etc; these should ideally be eligible for weighted deduction. Considering the gestation period with regard to R&D and that benefits, if any, are available after long gaps, unutilised R&D weighted deduction should be available for carry forward for at least 10 years (if not more) and weighted deduction should be allowed while computing book profits under MAT provisions. Indigenous R&D (Patent) – option should be given to the resident taxpayer to avail benefit of concessional tax regime or opt out of the same.
A deemed dividend approach should be followed in case of secondary adjustment (followed in the US and Germany) rather than a deemed loan approach, since under the former only a one-time payment is made which can be settled without a carry forward impact; the key challenge under the latter being – difficulties in accounting treatment. Alternatively, if the deemed loan approach is to be followed, then interest payment should be restricted to be a one-time payment. Limitation on deduction of interest under Section 94B relating to thin capitalisation. It is recommended to delete the word implicit guarantees to ensure ease in application of Section 94B(1).
– KPMG India
One can expect increased government spending in health sector
While the regulatory aspects of this sector are extremely critical to ensure effective compliance with the laws, what the Indian pharma industry needs the most is a significant fiscal incentive from an income-tax perspective.
What pharma sector needs
Last year, apart from announcing two new AIIMS (at Jharkhand and Gujarat), the Union Budget did not offer any significant tax breaks to the pharma sector. Thus, this year, being the last full budget before next general elections, pharma sector is all-fingers-crossed in hopes for a major fiscal boost. Considering that the government is implementing several schemes for betterment of the healthcare of different sections of the society which would need the support of manufacturing, one hopes that Union Budget 2018 announces a pan-India investment allowance for setting up factories/ units to manufacture pharma sector related inputs.
Secondly, the amendment which has reduced the weighted deduction (i.e. giving a tax break for more than what is spent) for expenditure incurred in relation to scientific research and eventually discontinue the same should be rolled back. This is because though the government’s objective to gradually phase out all fiscal incentives and ultimately lead to an overall reduced corporate tax rate is acceptable, given that scientific research is the most essential tool for the growth and progress of pharma and healthcare sector, this sector needs to be distinguished from the general corporates at least on this account. Moreover, currently, the weighted deduction concept is only applicable in relation to computation of income under the normal provisions of the Income Tax Act and not for computing the minimum alternate tax (MAT). To make this incentive more effective for this industry, the benefit of the aforesaid deduction should also be extended for computing the MAT.
Another aspect which needs to be expressly clarified is in relation to weighted deduction for expenditure on the outsourced scientific research. Given that in many instances, for better efficiency and for making use of the specialists, research activity is outsourced, it would be appropriate to clarify that the weighted deduction expenditure in relation to scientific research would be available even for outsourced scientific research. Needless to say, to prevent the misuse of this provision, suitable safeguards may be provided in the law itself.
In order to incentivise inventions and patents, the patent box regime (i.e. concessional tax regime for patents developed in India) was introduced in 2016. While the intent and object of this beneficial tax regime – to encourage indigenous R&D activities and to make India a global R&D hub – is undoubtedly clear, the language used in the statute book does not appear to be in sync. Currently, the benefit of patent box regime is restricted to ‘true and first inventor of the invention’ – even in case of joint patentees. Under the patent laws, where a company incurs expenditure and develops a patent with its employee, the company cannot be a ‘true and first inventor’. As a result, despite having incurred the development expenses in relation to the patent, the company (being the economic owner of such patent) may not be able to claim the benefit of this provision. Therefore, one would hope that the language is modified to ensure that in cases of joint patentees (especially where one of the joint patentee is a firm/ LLP/ company), the benefit of this regime is extended to the assignee of the true and first inventor.
On the litigation front, the root cause of controversy in a significant number of cases in the pharma industry has been a CBDT circular which provided that expenditure on freebies provided to medical practitioners in violation of applicable regulations do not qualify for set off against taxable income of pharma companies. As a result of this circular, the pharma companies are facing significant hardship and protracted litigation, as even genuine brand building and business promotion expenses incurred by them, say towards sponsorship of events organised by medical associations, medicine samples provided to practicing doctors, conducting awareness programmes etc, are being disallowed by the tax officers on the basis of wide reading of the CBDT circular. Thus, clarity should be provided to exclude such genuine expenses from the purview of the said circular.
As per Economic Survey 2016-17, the annual expenditure by government (Central and State Governments combined) on health as percentage of GDP for last three years has been below 1.5 per cent every year. The National Health Policy 2017 envisages increasing expenditure by government on health to 2.5 per cent of GDP in a time bound manner by 2025. Given that this year, it is the last full budget before next general elections, one can expect increased government spending in this sector. One hopes that increased allocation to this sector is in the form of tax breaks and fiscal incentives, as such measures offer an economic benefit for the present, and lead to capacity building for sustainable growth as well as development of the sector.
– Ritu Shaktawat, Associate Partner & Raghav Kumar Bajaj, Senior Associate, Direct Tax team, Khaitan & Co.
Budget 2018 should consider nil GST on medicines/ devices
Globally tomorrow’s challenge is to develop new medicines that can prevent or cure currently incurable diseases and address unmet medical needs. Mortality rates from major diseases including heart disease, cancer and stroke are down dramatically. Most drugs on the market in developed economies have proven efficacy and safety. Pharma is a very large and complex growing part of the global economy. We predict that the pharma industry will grow substantially in the decades ahead. It is estimated that the total revenue of the pharma industry will triple in real terms between 2017 and 2060.
The pharma sector has great expectations from Budget 2018 as Government of India’s vision of Making India one of the top three pharma market by 2020 can only be achieved if there is a booster dose for pharma and healthcare sector. Budget to develop a proactive approach towards building better quality, compliance and become a facilitator of funds and platform leaving the mechanism of delivery to pharma sector which is primarily driven by private sector. In order to stay competitive in the overseas market and given the uncertain global climate that Corporate Tax to be reduced to half and specific impetus or incentives should be given to innovation in the form of increased weighted deduction on R&D, adding filing fees and clinical trial under exemption, incentives for patents.
India remains one of the largest poor countries on per capita basis. India’s per capita (nominal) income was $1670 in 2016 ranked at 112th of 164 countries by the World Bank. Medicines/ devices are taken by patients not by choice but because of disease therefore we should provide medicines at the lowest cost. We know that Government of India has taken many steps in this direction but Budget 2018 should consider nil GST on medicines/ devices as they are taken by poor people of India.
– Vinod Arora, Principal Advisor, IGMPI
We need help from the government in terms of stronger regulations on both manufacturing and drug registration for Ayurveda
In the past few years there has been almost a mass consciousness towards natural wellness including Ayurveda. This is largely due to two factors, one being the efforts taken by the Ministry of AYUSH by commemorating the ‘International Yoga Day’ and ‘National Ayurveda Day’ and the other being the plethora of FMCG players who have flooded the market with herbal and Ayurvedic products, the likes of Unilever’s Ayush, Patanjali, Shri Shri Tattva, etc. Additionally, the market has also seen niche premium brands like Kama, Khadi, Forest Essentials who have started to make their presence felt. The Ayush ministry has been putting serious efforts and is making substantial leeway to promote Ayurveda in India and abroad. While the government has been focusing on export promotion as well as expertise in manufacturing ayurvedic products, the major assistance that the ayurvedic industry needs from the government today is the ease of reaching out to international markets.
Ayurveda is a wide phenomenon internationally. At present, the ayurvedic products market is expected to be at $2.5 billion dollars. The government expects the market for ayurvedic products raise to $ 8 billion by 2022.
To start with, our government could start discussions with governments globally to recognise Ayurveda as a medical system allowing us to register Ayurvedic products and claim them to be medical. China has done this very effectively with their Chinese medicines and so has Homeopathy. We feel that we need government’s help to do this globally for Ayurveda. While the government has been trying to do this, a larger push from their end will benefit the industry largely. Domestically, the government has been helping and promoting Ayurveda and yoga globally. However, from a larger manufacturer perspective, the help we need from the government is in terms of stronger regulations on both manufacturing and drug registration for Ayurveda so that we make sure that every product in the market actually complies with the high standards of manufacturing and product development. Currently, the same is only being adhered to by a few larger companies. We would actually like government regulations in the industry as a whole to improve the domestic part of the market.
– Sandeep Bali, CEO, allAyurveda.com
Budget 2018 must avoid temptation to bolster govt revenue myopically
The Budget 2018 is the last full Budget of the present government and also the last one before eight state elections and the 2019 General Election. We expect this Budget to be a populist one.
The government is planning an overhaul of the drug policy. Under the new rules, the government is planning to scrap the need to renew various licences and ease regulations to allow medical and drug research, among others. There is a need to re-enact Drug & Cosmetic Act to match current regulatory requirements related to quality, efficacy and safety of drugs. The sector needs R&D incentives in the form of tax rebate and fund allocation given the capital intensive nature of the sector and long gestation periods.
The government could relax licencing conditions for pharma/ API/ biotech manufacturing units to encourage investments.
The government needs to create a robust framework — a cluster-based approach to diminish the dependency on China for the import of crucial APIs.
E-commerce players are looking for a policy push to streamline the regulatory environment for e-pharmacies.
High sounding words and some dos are heard from the union ministries regarding help and boost to be provided to MSME sector all around the year. A standalone policy to help the MSME sector in the pharma area in terms of quick decisions being offered in terms of loans to substantially improve the manufacturing units to worked standards (WHO GMP units) has been awaited by the industry. Positive steps on this front will be highly recommended as this is the need by the hour, both in API sector and formulation.
We hope that the growth focus would continue even if comes at the cost of some slippage on the fiscal deficit side. The government should not stop doing investment in the year to come. It is not the time to consolidate on the fiscal side at the cost of growth. We also expect that government to cut corporate tax to 25 per cent. With the US tax rate cut, it is very essential that we should bring down taxes. Even if they bring it down to 28 per cent it will be great relief to the industry.
Central Board of Direct Taxation (CBDT) has a proposed reduction of weighted deduction of expenditure incurred on scientific R&D from 200 per cent to 100 per cent, which could hamper the innovation edge of the sector. The government needs to continue these weighted deductions along with deductions under Section 35 (2AB) of the Income Tax Act.
In order to promote R&D in India, the amount of weighted deduction should be deducted while computing book profits for the purpose of MAT.
The DSIR should not decide the quantum of R&D expenditure entitled to weighted deduction. Considering the longer time taken in R&D and its benefits available, government should clarify that unutilised R&D weighted deduction should be available to be carried forward for at least 8 to 10 years.
We expect by March, the GST regime should stabilise. By end of the FY 2019, we expect government will bring down the GST to two to three slabs. From FY 2019, we will see real pick up in tax revenue because of GST. There should be around five per cent additional revenue in indirect tax. The worry is that with changes in most indirect taxes out of the control of the government following transition to GST where revenue collection is below expectation government will think about the direct taxes to offset the transition challenges. Hence budget 2018 must avoid the temptation to bolster government revenue myopically.
The government should expedite the process of ITC refund/ transitional credit as EOU oriented companies having inverted duty tax structure suffer a lot on account of delay in refund which result in blockage of working capital.
– Suryakant Mardhekar, Sr. Manager – (Finance & Accounts), Bliss GVS
We are all expecting a ‘popular’ but not a ‘populist’ budget
The government’s focus this time is likely to be on infrastructure, recapitalisation of public sector banks and reducing the stress on the rural sector. The budget is also likely to overhaul the income tax administration by improving efficiency of tax collection by reducing the human interaction and depending more on technology.
Pharma and life sciences industry is looking for reduction in corporate tax to make it globally more competitive. Globally, the corporate tax rates have fallen from average 27.5 per cent to 23.6 per cent in a span of 10 years. In India, corporate tax has averaged 35 per cent over last two decades. This, coupled with MAT on book profits and dividend distribution tax (DDT), make India one of the highest tax regimes in the world.
The DDT often discourages companies from paying dividends. This has negative impact on investment. Time has therefore come to scrap DDT.
While the government has promised to reduce the corporate tax to 25 per cent in a phased manner, the glide path for the same is missing. Giving a roadmap will enable the corporates to take more informed investment decisions. Now that the GST is slowly getting stabilised, it is time to consider reducing the number of slabs from five to three and do away with cess on some categories. In the last budget, announcement was made to create 34 mega modal logistic parks. Process should begin to operationalise these plans which will significantly reduce logistic and supply chain cost which is one of the highest in the world. Transfer pricing laws have also resulted in widespread litigation and need rationalisation.
Being a knowledge-based industry, incentivising innovation by way of weighted deduction for R&D, filing patents, reduction in import duties for advanced instrumentation and equipment required for drug discovery research etc. would go a long way in making India an innovation hub. As pharma industry is becoming more and more reliant on technologies such as AI, IOT, robotics and automation to increase productivity and efficiency, the import duties on such technologies need to come down significantly. Similarly, some newer regulations coming from regulatory agencies in US and Europe such as a track & trace system and serialisation for drugs exported to these countries from India would need investment in expensive equipment. Not only such equipment should be made duty free, but the government should also give soft loans to midsize pharma companies to acquire them to enhance export.
Medical Council of India recently amended its guidelines to encourage prescribing generics. While MCI’s fate is currently undecided, it is possible that the budget may indicate changes in Drug and Cosmetic Rules towards this initiative. While this move may make drugs more affordable to the common man, without an effective regulatory system to monitor quality, safety and efficacy, it will be a disaster for the patient. It will also disincentivise companies who have assiduously built strong brands in spite of intense competition, and it is also contrary to the policy of encouraging protection of intellectual property.
Lastly, we are all expecting a ‘popular’ but not a ‘populist’ budget.
– Dr Ajit Dangi, President and CEO, Danssen Consulting
Govt should encourage domestic API & raw material manufacturers
In 2017 Indian pharma market saw many ups and downs. One of the significant reforms which came into effect was GST. The implementation of one uniform tax will ease the way of doing business in the country, and minimise the cascading effects of manifold taxes that are applied to one single product, impacting the overall cost of operating. Moreover, GST would also improve operational efficiency by rationalising the supply chain. It has made it imperative for pharma companies to review their strategy and distribution networks.
In 2018, we would like the government to have robust planning for the pharma sector. The sector is already battling price control policies and various government policy changes are further adding to it. If the government takes a 360o view in framing any policy for the pharma sector where all stakeholders are consulted , it would lead to an ideal win-win situation for all. The government should also encourage the domestic API and raw material manufacturer as we face stiff competition from Chinese suppliers. A strong policy would also help generate more job opportunities and contribute to the government’s marquee ‘Make in India’ policy.
– Rahul Kumar Darda, Chairman & Managing Director, Brinton Pharmaceuticals
We hope upcoming budget brings ‘Acche Din’ for pharma sector
It will be an interesting budget and with 2019 elections coming up, the budget seems to be leaning towards a populist one. As always, people have a lot of expectation from this year’s budget in terms of tax relief. This year with the implementation of GST there was a drastic change in the indirect tax structure. The ideal behind introducing GST was to curb tax evasion. We hope the new budget comes with improved tax exemptions and changes in corporate tax.
The last three years have been challenging for the pharma industry with price regulation, demonetisation and GST implementation. This year we expect some normalisation to occur. With bans on combination drugs and increase in the number of 483s, the pharma sector has thus been facing brunt from both ends! Domestic manufacturing moved to the North-East portion of India to avail tax and excise exemption for 10 years. With the introduction of GST, this advantage stands reduced and a double component of IGST and CGST came into place.
With low consumptions in this area, companies are suffering because only 29 per cent is under CGST and 58 per cent under IGST. We are hoping these figures change in the upcoming budget, bringing back the tax advantage we had earlier.
Expectations are also focused on better incentives for exports and R&D expenditure related tax offset. A 50 per cent reduction in the offset limit from 200 per cent to 150 per cent should hopefully change back to the prior in this Budget 2018. This will allow for new products to be developed in India boosting Make in India campaign. All said and done, we hope that this upcoming budget brings back the ‘Acche Din’ for pharma sector!
– Suresh Pareek, Managing Director, Ideal Cures