How Budget can help pharma sectorThe Indian pharmaceutical and healthcare industry has witnessed steady growth over past years and is also expected to perform well in the future.

However, as has been well accepted, the potential which this industry carries is far higher. There are number of factors which would help to harness the potential, the responsibility of which lies in all quadrants of the industry, i.e. shareholders, financiers, academia, Government and so on.

Budget being around the corner, the focus is back on what Government can do to fuel the potential growth. With Government coming in with a good majority, the chances of a populist Budget like last year's are bleak. However, the talks by Government about reforms and focus on infrastructure are definitely positive signs.

The prescription for growth of Indian Pharma, Biotech and Healthcare industry is not new and is being talked about from sometime now – the key items are R&D, Contract Research and Manufacturing Services (CRAMS), clinical trials, augmenting healthcare and expansion to the local market. How the budget can help the prescription is discussed below.

With the current economic downturn as most companies are reeling to contain their costs, coupled with the fact that the Indian pharmaceutical and biotech companies are still at nascent stage as far as R&D scale and investment is concerned, R&D programme may get impacted due to the risks and long time involved in fetching returns. While, India is perceived as an attractive jurisdiction to outsource R&D work due to its low cost and high quality capabilities, to become a leader of tomorrow, Indian industry would need to be seen as an Innovator. This is where R&D and new products development will play a key role.

Currently, the only direct tax incentive available is a weighted deduction of 150 percent on certain R&D expenses, which comes with a host of attached conditions – this is clearly not attractive enough for the kind of impetus that needs to be provided to R&D in India. Hence, there is an absolute necessity to make better tax/ fiscal benefits available for the R&D activities. Even in developed economies, pharma R&D enjoys tax/ fiscal benefits such as research tax credits, which can be offset against tax liability, carry forward of tax credit, higher weighted deduction of research expenses including capital expenditure, etc.

The Government can look into tax holiday being made available to R&D units under section 80IA/ 80IB and extending these to foreign companies rather than restricting it to Indian companies. In respect of expenditure that is eligible for weighted deduction of 150 percent mentioned above, industry bodies have sought the enlargement of scope of benefit so as to include expenditure incidental to research carried outside R&D facility including clinical trials, bio-equivalence studies, etc, carried on in India or in any foreign country, which would provide incentive to Indian companies to participate in global R&D projects.

To incentivise exports, like the Government has in the IT sector, it can consider extension of benefits under Section 10A/ 10B to units engaged in pharma/ healthcare exports and extending this benefit beyond Assessment Year 2010-11.    
The hospitals that start functioning in specified Tier II and Tier III cities before 31 March 2013 are currently bestowed with a tax holiday on

profits earned by them in the initial 5 years. However, hospitals typically have a long gestation period, making it unlikely for them to make much of this benefit. To give a practical shape to the intention of the Government, this provision of law may be revisited to give an option to the hospital to choose a period of 5 years of initial 10 years of set-up. Extension of such tax holiday for another period of 5 years may also be considered.

This was about promoting India as an attractive destination for the global industry. There are set of things which can be done specifically to benefit the local market.

The Government can look at extending the list of life saving drugs, which are eligible for customs duty exemptions in India. This could be done by adopting an expanded list of an international body such as World Health Organisation (WHO) or introducing more live saving drugs/ therapeutic areas to the relevant list.

A roll-over issue from previous years (amongst others) is rationalisation of excise duty on the primary input for pharmaceutical products- Active Pharmaceutical Ingredients ('API'). Recent changes in the central excise duty rates have resulted in lower excise duty @4 per cent on pharmaceutical goods whereas the APIs continued to be charged to excise duty @8 per cent.
This continues the trend of accumulation of CENVAT Credit in the books of manufacturers, especially, those catering solely to domestic market. With no mechanism for refund of such accumulated unutilized credit, the said accumulated CENVAT Credit is a cost to pharmaceuticals manufacturers. The excise duty rate of API may be rationalised and made at par with the pharmaceutical goods.

Transfer pricing being a relatively new regulation has been a subject of debate between the industry and tax authorities. Introduction of Advance Pricing Agreement mechanisms for upfront clarity in intra-group transactions of MNCs is an agenda that has been on the radar for a long time.
This mechanism will further help ease out protracted litigation process that the MNCs go through in India. Also, there is no harmonisation between the transfer pricing regulations and the Drugs Price Control Order, which controls the pricing of scheduled formulations, making it difficult for the industry to establish the end price of the products. Harmonisation needs to be brought in to resolve such a conflict.

There is hope that some, if not all the issues which achieve high growth and make the operating environment for the industry simpler would be addressed in the forthcoming budget.