As far as the pharmaceutical sector is concerned, by 2020, India aims to achieve the position of the third largest player in terms of incremental growth. Almost 20 percent of global exports in generics from India make it the largest provider of generic medicines globally. Overall revenue position of this sector is targeted at $45 billion by 2020, which could rise up to $55 billion by 2020 as base case and can grow to $70 billion in an aggressive case scenario. Similarly, the overall spend on infrastructure of this sector to be directed at $200 billion by 2024.
Considering the thrust on the ‘Make in India’ initiative of the government, the pharma sector expects to receive various tax incentives to ensure overall growth of this sector. Some of these wish lists are as under:
Increase in weighted deduction : The Finance Act, 2016 has reduced the weighted deduction available on in-house R&D expenditure to 150 percent. With effect from 1 April 2020, the deduction will further be restricted to 100 percent of the expenditure.
Research and development (R&D) is one of the driving factors to accelerate growth of any sector. It, therefore, becomes relevant that the government act towards providing impetus to R&D activities.
As restriction of deduction in a phased manner might disincentivise the contribution towards evolution of this sector, there is a need for the government to reconsider the above deadline and extend the existing weighted deduction at least by additional 5 to 10 years. Alternatively, it may consider introducing similar sections like 80IA, 80IB, etc., which could be made applicable to industries engaged in pharma sector. Currently, the deduction is available only in respect of expenditure incurred on in-house R&D facility which has been approved by Department of Scientific and Industrial Research (DSIR). The government may consider allowing weighted deduction for the entire expenditure incurred for an approved R&D facility which is eligible for weighted deductions and clinical trials which are carried out in approved hospitals and institutions outside the research and development unit.
The DSIR guidelines introduced in May 2014 require certain relaxations. Currently, retainer/consultants and manpower on contract are not included as ‘R&D manpower’. Appropriate amendments may therefore be considered in the tax laws to include retainer/ consultants and manpower on contract as ‘R&D manpower’ to make them eligible for weighted deduction.
Patent regime: The new section 115BBF inserted by the Finance Act, 2016 appears to restrict the concessional tax rate only with respect to royalty income from exploitation of patents in India. A reading of this section indicates that for an income to be governed by the said section, such income should be in respect of a patent developed as well as registered in India.
In order to make India a global R&D hub and to contribute towards the dream of 'Make In India' in the next budget, it may be re-considered extending the benefit of section 115BBF also to income in respect of an intellectual property developed in India, where the patent may be registered in any country. Further, the provisions of said section 115BBF applying the definition of ‘eligible assesee’ read with that of ‘patentee’ seem to restrict its applicability only to individuals. This is in view of the fact that in terms of the Patents Act, only an individual can be regarded as a ‘true and first inventor’, i.e. in other words, a company / non-individual assessee cannot be regarded as a ‘true and first inventor’ under the Patent Act.
Considering that the intention of the section to provide benefit to all assessees (including companies) that fulfill the prescribed conditions, it may be considered to clarify the provisions, which may provide an impetus to the growth of pharma companies.
Minimum Alternate Tax: Currently, weighted deduction is not allowed while computing book profits. It will be a welcome proposal if weighted deduction under section 35(2AB) is allowed while computing tax under section 115JB.
Rural healthcare infrastructure: Currently, deduction is available for hospitals where the specified business is in the nature of building and operating a new hospital with at least 100 beds. India’s healthcare sector witnesses close to 50 percent spend on in-bed patients suffering from lifestyle diseases like diabetes especially in urban and semi-urban areas. With the rapid growth in diseases and consequently healthcare costs rising, it is imperative for the government to liberalise the provisions of section 35AD to include new hospitals having less than 100 beds.
Further, 100 percent deduction is available to an undertaking deriving profits from the business of operating and maintaining a hospital located anywhere in India except certain urban areas which has been constructed and started functioning during the period 1 April, 2008 to 31 March, 2013. The provision may be extended beyond 31 March, 2013 and the benefit may also be extended to hospitals situated in those areas which had been excluded.
Medical Reimbursements: The amount of non-taxable medical reimbursement allowed to the tax payer is Rs 15,000. It will be a welcome proposal if the Government enhances the limit of medical reimbursement at least to Rs 50,000 considering the increase in medical expenditure.
(Patil is director, Shetty manager, and Bhavishi assistant manager with Deloitte Haskins & Sells LLP)
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Updated Date: Jan 16, 2017 08:29 AM