Industry stakeholders share their wish list for the pharma industry from the forthcoming budget
The Union Budget for FY17 should provide tax incentives for R&D activities in the country
2015 has been a mixed bag! Prime Minister Modi’s ‘Make in India’ vision, to transform India into a global manufacturing hub, presents huge potential for the pharmaceutical sector. The pharma and healthcare industries in India are expected to grow to $45 billion and $250 billion respectively by 2020, with patented drugs expected to grow at an aggressive CAGR of 20 per cent.
In 2016, our foremost expectation is an increase in the government expenditure on public health. We request that the government increase the healthcare budget from the current one per cent to at least 2.5 per cent over the next two years. Implementing the promised Universal Health Assurance programme will benefit patients and increase access. We would also like to see the Union Budget for FY17 provide tax incentives for R&D activities in the country, either by way of a tax holiday or by extending the sunset clause on weighted deductions. This will go a long way in transforming India into an innovation hub for pharma products.
In order to avoid over dependence on China for import of Active Pharmaceutical Ingredients (APIs), we expect a robust policy to boost the manufacture of APIs. Secondly, steps need to be taken to create adequate infrastructure. From a tax point of view, investment-based tax incentives such as Special Zones for manufacture and export of APIs and Special Package Schemes similar to Modified Special Incentive Package Scheme (M-SIPS) or Electronics Manufacturing Cluster Scheme could be declared.
On direct tax
While the government plans to phase out weighted deductions in light of the proposed lower corporate tax rates, it is important to provide an impetus and incentives for R&D activities to be carried out in India. Providing for a tax holiday or a lower rate of tax for income derived from R&D activities and benefits in the form of research tax credits which can be used to offset future tax liability (similar to those given in developed economies) could also be introduced. This could be introduced with a sunset clause of at least five years in order to ensure growth of R&D activity in India.
On indirect tax
Under the current excise regime, inputs i.e. APIs attract higher rate of excise at 12.5 per cent whereas the output is taxed at six per cent. Given the inverted duty structure, credit of excise duty paid on procurement of APIs used in the manufacture of finished formulations has typically resulted in accumulation of CENVAT credit, a cost to manufacturing entities, as the complete amount of duty paid on inputs cannot be set off against the output tax liability. Further there is no provision to recover the accumulated tax credit. The excise duty rate of APIs should be rationalised and made at par with pharma goods i.e. GST on the inputs (APIs) should be reduced from 12.5 per cent to six per cent. The same should also be rationalised in the proposed GST regime where the inputs are eligible for a credit of 10 per cent whereas the output CGST rate is six per cent.
Under the Central Excise Act, 1944, an abatement of 35 per cent is allowed for the purpose of levying excise duty on pharma. An abatement of 45 per cent to 50 per cent is necessary to enable the industry to cover its costs while calculating the excise duty payable. Moreover, there are other industries such as clocks (43 per cent), mineral water (50 per cent), glazed tiles and vitrified tiles (45 per cent) that enjoy a higher abatement percentage. There are increased expenses that need to be incurred by pharma companies. Further, the rate of excise duty (as well as proposed GST) has also increased from five per cent to six per cent. Therefore, this abatement on pharma should be increased 45 per cent to 50 per cent as the current 35 per cent abatement does not even cover the trade margins and the value of R&D costs and other costs associated with the pharma industry such as distribution of many medicines through the cold chain (e.g. vaccines). There remains ambiguity between customs and transfer pricing on pricing of imports. It is imperative that uniformity be brought between the methods and results of both these critical components.
– Ranjana Smetacek, Director General, OPPI
- Tax benefits should be given on manufacture and sale of medical devices/equipment manufactured in India. Since medical device manufacturing is one of important sectors as a part of the Make in India initiative, giving tax incentives or a tax holiday would boost this sector and lead to provision of economical devices to the patients in India.
- Tax exemption should be given to CROs involved in preclinical research. This is a long standing demand and would enable more companies to do research and development that may increase India’s visibility in this sector.
- Reduction in customs duty on medical devices/equipment that are not manufactured in India would lead to reduction in price that would ultimately benefit patients.
- Tax exemption/ incentives for pharma and biotech manufacturing companies as part of Make in India initiative will be a welcome step to boost the sector
- Tax incentives/ exemptions to e-health service providers/ telemedicine companies. These companies provide access to healthcare services. We need more such companies to cover areas that do not have access to healthcare or even semi urban areas that don’t have access to speciality expert care.
- Weighted deduction under Section 35 (2AB) to atleast 250 per cent. It will help boost research
– Dr Milind Antani, Nishith Desai Associates, Legal & Tax Counseling Worldwide
‘We hope that healthcare R&D will be given an impetus in the budget’
2015 saw the introduction of a more rational, balanced and scientific regulatory framework being built for the conduct of clinical research in India with amendments in several rules and guidances. We need to ensure that we continue on the trajectory to build an enabling environment in India to encourage a scientific temperament and research.
Given the fact that a sixth of the world’s population lives in India and we have the highest disease burden in the world, we need to foster an environment and ecosystem that encourages clinical research. We hope that healthcare research and development will be given an impetus in the budget. This will encourage local innovation and ensure that ‘Make in India’ and ‘Make for India’ becomes a reality in our sector. There is path-breaking research being done in our academic institutions. We need to ensure that this is recognised and encouraged so that our patients can benefit from the access to better, safer and more affordable healthcare such research makes possible.
We also hope that there will be a rethink on the withdrawal of exemption on service tax for clinical trials which was introduced two years ago. The withdrawal of the service tax exemption makes the process of drug development more expensive and acts as a deterrent to the culture of research and innovation that needs to be encouraged, in the domestic industry in particular.
– Suneela Thatte, President, ISCR
There is hardly any favourable expectation from the budget this year
There is hardly any favourable expectation from the budget this year for the pharma industry. With GST around the corner, it will be an additional exercise in costing for every molecule and this is not expected to bring in any benefit to the pharma sector other than simplifying tax returns. Initiatives like Make in India, Digital India, and Skill India, introduced by our Prime Minister are yet to have any visible impact in the country. In the past, we have seen increased budgetary allocations for healthcare schemes with little or no allocations for pharma companies.
There have been repeated demands for incentives on R&D expenditure. The pharma industry is getting crippled with erratic price control, there is hardly any incentive for R&D, even for generic drugs, leave alone R&D for drug discovery. Unless the pharma industry capitalises on the number one position achieved so far globally, the industry will have to face severe competition from China. The government is contemplating a disproportionate increase in fees by almost 200 to 500 per cent. The sector cannot withstand such high regulatory fees. The trade margins are also being reviewed. The government should try to control the retail sector rather than penalise the manufacturers. The uniform code for pharma marketing should be reviewed practically in consultation with the industry associations. The government is further tightening the good manufacturing practices (GMP) but is not willing to liberalise price control. The pharma sector is one of the biggest exporting industries in the country; so it is high time that the government formed a separate Ministry of Pharmaceuticals rather than clubbing it with the Ministry of Chemicals and Fertilizers.
– TS Jaishankar, Managing Director, Quest Life Sciences
Govt to set-up pharma clusters to encourage production of APIs
India’s pharma industry today plays a pivotal role as a global pharmacy. India is able to make all its formulations requirement from the domestic industry as well as exports. We are also fairly strong in the API sector, but we are now importing intermediates mostly, early stages of it and then taking over the further process.
To enable more self-sufficiency which ensures smoother supply as well as full control of quality, both for domestic requirements and exports, we need to invest more in this sector. Besides, we have an opportunity as many of European units are now being retired and the companies running them, are looking at both China and India as alternatives. To derive maximum mileage from the present global scenario and to support the industry to go to the next level we may need modifications as suggested below in the existing laws. FIPB route to be exempted for companies primarily deriving revenues from intermediates/ APIs/ biotech APIs business which are less than five years old and have net revenues of less than Rs 1500 crores.
Loans advanced to API/ intermediates or biotech API industries should be treated as loans advanced to priority sector. Government to set-up pharma clusters to encourage production of APIs and intermediates, especially of fermentation units. This would encourage many MSME sectors to scale up their quality and production levels by accessing these facilities and compete better in international markets. Formulations, which are referred under ‘Listed Drugs’, are imported for the purpose of demonstrating bioequivalence of generics before obtaining market authorisations. The industry requires these studies to be bracketed along with clinical trials for the purpose of exemption of import duties.
– Dr PV Appaji, Director General, Pharmexcil
‘The Government of India needs to establish a policy framework for the Indian clinical trial industry’
Ensuring proper compliance with regulatory norms will ensure that India continues to reap the benefits of clinical trials and the poor and vulnerable population is protected against exploitation for the purpose of research.
However, it is yet to be seen whether or not the new regulations will deter the clinical trials industry from continuing its operations in the long run. How can India benefit technologically as well as build capacity for future R&D and innovation in the pharma sector?
There is an expectation that India could gain financially and scientifically through clinical trials. The Government of India needs to establish a policy framework for the Indian clinical trials industry to provide easy access to affordable drugs developed through adaptive clinical trials in India.
– Vijay Patel, Chairman, ACRO India
‘Rolling out the long pending GST provisions is the need of the hour’
The pharma sector is one of the more crucial sectors to the Indian growth story. Being the third largest market on the globe in terms of volume and thirteenth in terms of value, the Indian industry has grown from strength to strength and continues to contribute heavily to the country’s economy.
Through the last budget, the Finance Minister announced a slew of long-term measures, including the reduction in corporate tax rates, though at the same time reducing the incentives (with the rationale of reducing tax disputes and uncertainty). The industry in itself is highly competitive and research driven. In such an industry, innovation is the key to success and growth. This was coupled with the revision in National List of Essential Medicines 2015, benchmarking the prices of key medicines has led to impact on industry profitability. Further, in the healthcare space, there is a tremendous need and scope for large investment to provide access to basic healthcare to all. Accordingly, there is a case for the Government to consider providing the requisite impetus to the industry to attract investment and enable it to scale up to meet the deficient requirements of the country. Hence, it would be vital for the FM to strike a fine balance between doing away with incentives and incentivising capital outlay and research to generate needed economic activity in this industry.
The industry’s demands from this budget are:
- Incentives for expenditure incurred on R&D activities
- Incentives for setting-up and operating entities in backward areas
- Detailed guidelines for transfer pricing aspects of key transactions (including intangibles)
- Incentives for investment in healthcare infrastructure/ setting up of hospitals
- Address concerns on inverted duty structure and roll out of GST
Changes in the international tax arena, in view of Base Erosion and Profit Shifting (BEPS) project, will provide a new angle to Budget 2016. With the pharma industry characterised by centralised manufacturing, R&D, intellectual property, etc., the FM has the tough task to ensure a balanced approach of implementing the proposals under BEPS. On this front, he will have to consider the value-drivers of the industry and carefully role out provisions (including country-by-country reporting), provide practical examples/ guidelines, ensuring that it does not result in disruption in the industry.
The transfer pricing arena has seen much unwarranted litigation. With several companies being multinational conglomerates there is a dire need to frame clear guidelines for benchmarking of key transactions around manufacturing, R&D, IP, marketing spend, etc. Further, companies face a dichotomy for the price of their import of APIs and raw materials, with customs (Special Valuation Branch), demanding higher import prices.
On the indirect tax front, rolling out the long pending GST provisions is the need of the hour. While the government is taking efforts to bring in the law, attention is also required on impact of provisions on the industry, given the peculiarity of business model and existing duty structure. In the interim, the government may consider addressing issues surrounding the ‘inverted duty structure’.
There is little doubt on the dynamic potential of the Indian pharma sector, which is projected to scale upto $100 billion by 2025. However, considering the state of the fiscal deficit and the slurry of changes in the tax environment like BEPS and GST, it seems that the FM will be walking a tight rope. While the ‘list of wants’ by the industry will be enormous, it will be interesting to see how many of them find their way into the Finance Bill, and more importantly, in what form!
– Hitesh Sharma, Partner and National leader – Life Sciences, E&Y
(With inputs from Himanshu Tanna, Director, International Taxation Services, E&Y)
There should be a reduction in import duties of med devices
There is a great desire to develop India as a drug discovery and innovation hub. Benefits by way of research tax credits which can be used to offset future tax liabilities need to be speedily put in place. For those who are already in the business of R&D tax benefits should be granted as deduction from profits linked to these investments.
The service tax exemption which was earlier available for clinical trials on newly developed drugs should continue so that India remains competitive in this field. Neighbouring countries such as Bangladesh, Malaysia and even Singapore are emerging as new hubs for such trials and this will hurt us in the long run. Alternately, necessary amendments should be made in the place of Provision of Service Rules, 2012 so that clinical trials or R&D services conducted for foreign service recipients should qualify as export of services and not attract service tax in India.
With the rising cost of healthcare, the limits for deduction of health insurance for individuals and senior citizens need to be further increased. It would be a big boon to patients who suffer from critical illnesses if life-saving drugs are made available to them at reduced prices through reduction in duties applicable to these drugs. Similarly, there should be a reduction in import duties and levies on medical devices and diagnostic equipment and consumables for detecting life-threatening illnesses as these will also be to the benefit of patients. The recommendations of the Chelliah Committee are yet to be implemented in spirit and rationalisation of customs duty for formulations needs to be done as a first step.
The pharma industry receives an abatement of 35 per cent on medicines while calculating the assessable value for the purpose of excise duty. Industries such as clocks and glazed and mineral tiles and even mineral water receive a higher abatement. This is certainly an anomaly that needs to be corrected. It would be in order for the pharma industry to receive abatement in the region of 45 to 50 percent.
These are but some of the steps the Finance Minister needs to take if the promise of Universal Healthcare for all is to be achieved. These together with creative policies will go a long way in creating an ecosystem that will not only encourage innovation but one that will actually serve to deliver top notch healthcare in the country.
The time has come to act and Budget 2016 presents the government and its Finance Minister this opportunity.
– Ranjit Shahani, Vice Chairman & Managing Director, Novartis India
(Compiled by Usha Sharma)