With a share of 20 percent of global exports (in volume), India is the largest provider of generic drugs globally and the opening up of the sector to foreign investment has further boosted the attractiveness of the sector. A few amendments announced by the Union Budget 2016 caused some concern for the pharma sector. Here’s a wish list of beneficial measures that the soon-to-be announced budget 2017 should contain to ensure the sector’s continued growth.
Phasing out of weighted deductions: According to figures, the Indian pharmaceutical sector has the potential to grow exponentially to the size of $300 billion by 2030. However, for achieving this, emphasis must be given to quality and research & development (R&D). The Finance Act, 2016 had, however, put a spanner in the works by reducing the weighted deduction from 200 percent to 150 percent from FY 2017-18 to FY 2019-20. Further, from FY 2020-2021 onwards the deduction will be further restricted to 100 percent.
In order to incentivise the industry, the Union Budget 2017 should ensure that the weighted deduction is comprehensive in scope and is made available to: (i) expenditure incurred on internally developed intangible assets, clinical trials conducted outside approved facilities, lease rent, building maintenance, municipal taxes incurred on the R&D facility; and (ii) ensure phasing out such deductions over a longer period of time. For clinical trials that are to be conducted by outsourced service providers, guidelines for them to act as an “approved facility” must be provided for.
Patent box regime: The Finance Act, 2016 introduced the concept of a concessional tax rate of 10 percent for royalties derived worldwide from patents developed and registered in India. One hopes that this concession should be extended to other forms of intellectual property developed and recognised in India and also to cases where there is more than one patent holder, for instance an entity (corporate or otherwise).
E-commerce and transfer pricing: Given that the pharma sector has entered the e-commerce space, the limits specified under the Safe Harbour Rules (SHR) towards compliance with the Indian transfer pricing regulations have gained importance. The definitions of software development services, contract R&D services in the SHR are ill-defined. Additionally, the present mark-up also needs to be rationalised.
Boost to SMEs: In furtherance of the investment allowance (additional 15 percent over annual tax depreciation) introduced by the Finance Act, 2014 to companies who invest substantially in plant and machinery, the Union Budget, 2017 should ideally increase the quantum of this allowance which could be a shot in the arm for the growing contribution of SMEs to the sector.
Disallowance of expenses: While medical malpractices of quid pro quo between doctors and pharmaceutical companies have been restricted by a Revenue Departmental Circular which disallows expenses incurred by such companies in providing perquisites to medical practitioners, the unbridled discretion given to tax officers needs to be curtailed. Guidelines on implementing the Circular would be a welcome relief to the sector.
Tax benefits under Section 72A: The tax benefits of carry-forward and set off of losses and unabsorbed depreciation for companies undergoing amalgamation are currently limited to industrial undertakings which is restricted to certain sectors (e.g. computer software, electricity, power, telecom etc.). This benefit should be extended to pharma companies engaged in R&D as well.
The Indian pharmaceutical market is the third largest (in volume) in the world and the importance of this sector in heralding India as an emerging economy cannot be ignored. Given that the pharmaceutical sector has experienced several challenges, especially in light of the recent Supreme Court judgment on drug price control on 22 October 2016, the Union Budget 2017 is expected to act as a panacea for the industry’s ills and buttress India’s position as a front runner in the sector.
(Aditi Sharma is a Senior Associate and Maulika Hegde, Associate, Khaitan & Company )
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Updated Date: Jan 27, 2017 15:20 PM