Union Budget 2023-24: Will Budget provide a booster dose for Indian pharmaceutical industry?

The Indian pharmaceuticals industry showed resilience, speed, and reliability in dealing with the COVID-19 pandemic challenges in India and provided much-needed aid to many other countries. Budget 2022-23 gave a blueprint to steer the economy over ‘Amrit Kaal’ for the next 25 years – from India at 75 years of Independence to India at 100 years of Independence. With rising inflation in many countries and the recent surge in COVID-19 cases in China, the Indian pharmaceuticals industry is awaiting strong policy measures to provide further impetus to continue the ‘Make in India’ initiative and touch the estimated $130 billion mark by 2030. From a tax and fiscal perspective, the industry may be looking for initiatives in the areas listed below, to supplement its growth: Increase in budgetary allocations The Indian pharmaceutical industry plays a prominent role in the global pharmaceutical market. The National Health Policy, 2017, earlier suggested an increase in health expenditure by the government as a percentage of GDP, from the existing 1.15 percent to 2.5 percent by 2025. Last year’s Budget saw an approximate 16 percent hike in the budget allocations in view of the COVID-19 crisis. It is expected that this year’s Budget allocation to this sector would increase further. Incentives to enhance API manufacturing   During the last few months, most countries have experienced disruption in the pharmaceutical supply chain because of their heavy dependence on China for APIs and excipients. This is an opportunity for the Indian pharmaceuticals industry to leverage its advantages and undertake reforms to provide a fillip to API manufacturing in India. The government could continue to provide support by way of tax incentives, such as:

• Extension of the time for commencement of manufacturing by new manufacturing companies which can avail of the concessional 15 percent corporate tax rate by another five years, i.e., up to 2029,
• Revival of deduction under Section 80IC of the Income-Tax Act for manufacturing or expansion in the prescribed states,
• Reduction in GST and import duty on APIs.

Tax-related incentives specific to the pharmaceuticals sector would go a long way in realizing the objective of the government for self-sufficiency in the manufacturing of APIs for life-saving and other critical drugs. Boosting R&D, promoting innovation The Indian pharmaceutical industry has been providing generic medicines and affordable vaccines globally. The industry depends heavily on R&D and innovation to be able to keep pace with the scientific advancements happening across the globe. The government needs to bring in R&D-focused incentives, policies, regulations, and simplified compliances to promote investments in R&D and innovation. Outlined below are a few expectations around R&D incentives/policies:

• Provision of the weighted average deduction for R&D and contribution to scientific research institutions, universities, etc., in the range of 200 percent to 300 percent,
• Provision of R&D incentives even to companies that opt for the new tax regime under Section 115BAA/115BAB of the Income-Tax Act, thereby availing of the corporate tax rate of 25 percent/17 percent,
• Inclusion of the cost of R&D outsourced while computing R&D incentives,
• Broadening the patent box regime, which only includes income from India-registered patents, to include patents registered outside India where exclusive licenses in respect of foreign patents are given to India and in respect of royalty/technical fee/milestone income arising out of patent which is developed in India and registered as well as exploited outside India.

Adequate grants by government bodies, especially for early research projects with startups/entrepreneurs can fuel R&D and innovation in the sector. The procedure to apply for and receive grants is very cumbersome and it is expected that this process will be simplified. Some European countries have started setting up special funds to support startups. In line with the same, the Indian government should also consider allocating funds specifically towards research and innovation to support startups. Ease of doing business Ease of doing business is a critical factor for India to attract foreign investment and to make the existing industry cost-competitive. The government could include export incentives, easier duty structures and enhance transparency and efficiency in obtaining regulatory approvals (including fast-tracking of regulatory clearances on new drugs and clinical trials). The approval processes in India are state-specific and this is not viewed favourably by investors who want to set up manufacturing facilities. It is expected that the government will address this issue by establishing an overarching body for granting approvals. It is a common practice for pharmaceutical companies to distribute free medical samples (also termed physician samples) to medical practitioners to test the efficacy of the medicines/ drugs so formulated. However, the distribution of such samples has been recently brought under the purview of the withholding tax provisions (Section 194R), treating such transactions as benefits to medical practitioners. It is expected that further clarification would be provided in respect of the applicability of withholding tax provisions in cases where free medical samples are distributed by pharmaceutical companies to doctors/ medical practitioners to test the efficacy/ curability of such medicines/ drugs. In addition to this, it is expected that appropriate amendment or clarification may be issued to do away with the requirement to reverse Input Tax Credit (ITC), in respect of goods given as free samples to physicians as the same is being considered as sales promotion expenses by the companies. It is anticipated that various regulations applicable to medical practitioners and pharmaceutical companies such as MCI, UCPMP, D&C Act and income-tax laws, are integrated and aligned for better governance and implementation. The provisions of the Income Tax laws also provide for tax deduction at source (TDS) and tax collection at source (TCS) on the purchase and sale of goods respectively. For ease of doing business and to reduce the compliance burden, a single provision is expected to be in force for the sale/purchase of goods. Considering that TDS provisions are being complied with for other sections as well, TCS can be completely done away with on the sale of goods since data collection can happen on the purchase side. The industry is hopeful that appropriate clarification to exclude cases of purchase of goods through POs placed on electronic portals, ERPs, etc., (typically not from websites) from the applicability of the Equalisation Levy, shall be issued. Global MNCs are also wary of the complex tax laws in India. It will be prudent for a fast-track mechanism to be built to take up industrial disputes and mitigate long-drawn tax litigation. Provisions for a complete stay of demand without any need for payment in cases where demand pertains to matters covered in a taxpayer’s own case/binding High Court and Supreme court rulings are much awaited. The life sciences sector in India is well-poised for a stable phase of multi-decade growth. The industry is eagerly waiting for the curtain to be raised on February 1, to reconcile with the expectations of introducing reforms to streamline and simplify regulatory requirements, incentivize R&D and manufacturing, create world-class health infrastructure, focus on preventive healthcare, higher budgetary allocation and addressing logistical constraints which can bolster the estimated growth of this sector and create landmark opportunities in the time to come. (Ashish Jain is a Partner with EY India (@EY_India). Pari Shah, Director, EY India also contributed to this article. Views are personal) Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.