Budget 2015: Pharma sector hopes to see higher spending in research

By Rahul Patni, Tax Partner - Life Sciences, EY India

With all eyes glued on Finance Minister Mr Arun Jaitley, Budget 2015 is the next big event that has been so keenly awaited after the India Pakistan world cup match.

The Indian Pharma sector promises to be one of the fastest growing segments of the Indian economy and its future outlook is distinctly upbeat. Increasing population, rapid urbanisation, increasingly sedentary lifestyles, changing diets and technology advancements are expected to promise impetus to the Pharma sector. This article focuses on the various fiscal measures which could act as key catalyst to fillip growth in the Pharma sector and thereby help further strengthen healthcare access of Indian population.

To begin with, as the Government is keen to work with pharma industry and make suitable amendments in policies to enhance manufacturing activity, inclusion of the pharmaceuticals sector in the " Make in India" campaign has provided a unique opportunity to the industry to push its agenda of R&D, innovation and affordable healthcare for all. To fructify the said opportunities, the industry expects the budget to support the campaign which would provide a fillip to exports, manufacturing and innovation oriented research in the said sector.

It is seen that within the pharma sector India is well positioned on the manufacturing front. However, a lot needs to be achieved in the arena of R&D. With research driven business becoming the business model for the industry, it is imperative for the Government to provide much desired impetus to promote higher spending in research. This can be done firstly by proving full exemption from excise and custom duties on inputs required for R&D activities. Secondly, providing weighted deduction to units engaged in contract research activities and Clinical Research Organization. While India is perceived as an environmentally conducive destination to outsource R&D activities, with a clear advantage of availability of high skilled labour, it is an industry-wide perception that the tax laws are not entirely flexible to provide impetus to R&D. Lastly, allowing weighted deduction in respect of expenditure incidental to research carried outside the R&D facility in India or in any foreign country would also increase the scale of R&D to be carried out in India.

There is a need for clarifications on the scope of a circular issued by CBDT on inadmissibility of expenses incurred in connection with medical practitioners by pharmaceutical and allied health sector industry. Although the Circular has been introduced to disallow unethical payments by pharmaceutical and other allied healthcare companies, it is unclear in its current form on the scope of expenses sought to be covered. This has led to wide spread ambiguity amongst the pharmaceutical industry thereby defeating its purpose and opening the floodgates to unwarranted litigation. Considering the representations that have been made on the said subject, the Government should seek to provide directional clarity on the said circular in order to reduce litigation.

On the transfer pricing domain, there is immediate need to frame guidelines to provide benchmarking of Advertising, Marketing and Promotion (AMP) spend by the companies especially to avoid unwarranted litigation. Additionally, there is a need for formal guidelines for application of CUP method whereby the innovator should be differentiated from the generic, except where such comparison is based on scientifically proven method.

The Government should look at extending the tax holiday offered for setting up of new hospitals to 10 years from the current provisions which allow hospitals a tax holiday for a 5 year period. Basis industry prudence, a tax holiday of 5 years 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. An extension of the tax holiday to hospitals in metros will successfully promote medical tourism in India.

Presently, the tax laws in India prescribe a rate of 15% depreciation on medical/ surgical/ pathological equipment estimating it to have a life of 15 years which is unrealistic with regard to industry standards. The Budget should seek to increase the same to 60%, to encourage upgradation to latest technologies and incentivizing investment.

Individual medical expenses in today's day and age are going through the roof due to increasing price levels and soaring inflation. While the current provisions allow a deduction of only INR 15,000 on individual medical expenses, it only seems fair to provide for an increase in the maximum allowable medical expenditure for salaried persons, making healthcare more economical for a large part of the general populace.

On the indirect tax front, the long pending demand of the industry on the aspect of "inverted duty structure", waiver from levy of service tax on R&D/clinical trial services performed in India where the recipient of service is situated outside India remains unaddressed. The Shome Committee has also suggested a slew of tax reforms in its recent report submitted to the Finance Ministry. Hopefully, some of the suggestions such as dismantling of the Special Valuation Branch (SVB) should be implemented. Apart from the above, industry and trade would look forward to a GST road map from the Finance Minister in the Budget.

With the initiation of the 'Make in India' campaign, quicker, smoother and clearer policy, aimed at long term stability, not just on the tax front but also on the regulatory front is of paramount importance. While it is important to not deviate focus from the potential contribution of the life sciences sector to economic prosperity, a fine balancing act, with more affordable and accessible healthcare for the masses is what the people will expect the Government to offer. It will indeed be interesting to see what the think tank in the administration has in store for the sector in Budget 2015.

(Sarvesh Nayak, senior tax professional, EY contributed to the article)

(Views express are personal)