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Ramesh Swaminathan, CFO, Lupin


This year’s Union Budget also has some measures for the pharmaceutical sector

The budget presented is a well-balanced one given the way the global economy has been over the last one year. The good part is that the finance minister has chosen to maintain the fiscal deficit at 3.5 per cent and has to be one of the most inclusive budgets in recent time given the government’s tilt towards stepping up on developing rural infrastructure and providing impetus to India’s rural economy.

There are some prudent steps taken, from an employment generation standpoint which is the need of the hour. The allocation of Rs 1804 crore for skill development will provide the right fillip for the manufacturing sector by providing access to skilled manpower, in turn creating employment. This year’s Union Budget also has some measures for the pharmaceutical sector such as encouraging innovation in the industry with a 10 per cent rate of tax on income from worldwide exploitation of patents developed and registered in India by a resident. In addition, service tax on services provided by Biotechnology Industry Research Assistance Council (BIRAC) approved biotechnology incubators to incubates being exempted will provide an impetus to start-up biotech enterprises and new units, as this exemption could have a direct impact of 14 per cent on the bottom-line of such enterprises. Having said that, the deduction for expenditures on scientific research (R&D) being cut from 200 per cent to 150 per cent beginning in April ’17 and eventually phasing out from 2020 will have a negative impact on the Indian pharma industry. The duty drawback schemes have also been widened and deepened to include more products and countries which would be a positive for export-oriented pharma companies.

The devil is of course in the details, for example key impact areas across sectors from an indirect tax perspective could be as follows:

A new Krishi Kalyan Cess is being imposed @ 0.5 per cent on all taxable services w.e.f. June 1, 2016. This would have a negative impact on cash flows, even though it would be creditable.

Service tax credit can now be distributed to outsourced manufacturers, i.e., to LLM and P2P manufacturers. This would result in lesser burn-out of service tax at the time of distribution, going forward.

Interest rates have been standardised at 15 per cent p.a., w.e.f. April 1, 2016, a move away from the variable rates presently applicable (between 18 per cent and 30 per cent). This would provide relief to assessees as a potential tax liability on an interpretation matter could actually result in a huge interest burden.

A clause has been inserted (w.e.f. March 1, 2016) restricting the quantum of rebate to the value of such goods sold in India. Due to this change, the Central Excise rebate which is presently being claimed on export of goods may get restricted on high margin export consignments.

The normal limitation period for issuance of a show cause notice by the Department has been raised from one to two years in case of Excise and Customs matters; 30 months in case of service tax matters. Thus, any tax/ duty related risk would extend for a longer period, even in cases where there is no malafide intent.

Even though, the budget has increased healthcare spends with announcements such as the health protection scheme which will provide health cover up to Rs 1 lakh per family and ensuring quality health services to a larger populace which may entail increased demand for pharma products and ancillary medical equipment. The proposed ‘National Dialysis Services Programme’ is a good initiative which would decrease the financial impact of prolonged and expensive treatment for dialysis patients. In addition to that, the proposal to open 3,000 stores for generic drugs is a step in the right direction for creating accessibility to affordable medicines, however, demand for branded products could be impacted due to this. Having said that, the budget, as has been the case in the past five years needs to do more when it comes to making healthcare and medicines accessible. The budget must focus on incentivising the creation of requisite healthcare and medical infrastructure; it must incentivise research and development, encourage pharma manufacturing and exports from the sector. Also, last but not the least the implementation of the GST bill will give a big push to increasing ease of business across sectors.

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