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Once again, nothing much for pharma

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20160331ep02In his third budget, Finance Minister Arun Jaitley has taken one more shot at a balancing act between maintaining fiscal discipline and loosening the purse strings to provide a growth impetus.

This time, the health sector did find some cheer, thanks to the announcement of health insurance of up to Rs 1 lakh per family, a national dialysis service programme with excise duty waiver for dialysis equipment and the opening of 35,000 medical stores under renamed Pradhan Mantri Jan Aushadhi Yojana. Given the 13 per cent hike in Budget allocation for health, this year is being seen as a windfall year compared to budget announcements in recent past years (http://indianexpress.com/article/cities/delhi/union-budget-2016-rsby-health-protection-scheme-national-dialysis-programme/). But these too are being seen as minor, considering the country’s health indicators.

Pharmaceutical companies were by and large left disappointed by the lack of any bold reformative steps specific to the pharma sector, though it will benefit from moves like the deferral of the sunset clause for Special Economic Zones (SEZs). This must have pharma manufacturers heaving a sigh of relief for now, even though there were no specific incentives to pharma clusters, inspite of the crucial need to ramp up production of APIs. As part of the ‘Make in India’ vision, the budget also announced that benefits for new units in SEZs will be provided to facilities set up before March 31, 2020. This is being viewed as a clear signal for manufacturing companies to not pull out of SEZs, which have of late, come into question due to lack of infrastructure and uncertainty on the period of tax holidays.

So also, it is hoped that the budget’s accent on rural infrastructure and economy will result in increased spending power of the rural consumer and hopefully better access to this segment of the population. But of course, this is a long-term bet as in the short term, the new Krishi Kalyan Cess of 0.5 per cent on all taxable services from June 1 this year will be a drag on balance sheets of all corporates.

While the FM has moved in favour of patients with the thrust to the Pradhan Mantri Jan Aushadhi Yojana, its impact on the pharma industry could be a further erosion of profit margin, and a move towards a value and volumes play. Maintaining quality of generic drugs available at these stores will be a challenge, given the stretched regulatory infrastructure.

The main disappointment for the pharma sector is the decrease in R&D weighted deduction to 150 per cent and its phasing out by 2020, which could discourage R&D spends. This seems contrary to the government’s stated intention to encourage innovation through the Start Up India plan. Does the government feel that taxation of royalty income at 10 per cent for innovations discovered and registered in India and the ‘Special Patent Regime’ would be enough to spur innovation?

Is the emphasis more on incentivising innovation in start ups, rather than established companies, going by the logic that scarce resources should first go to the former, rather than the latter who should now have the means to fund their own R&D? This could explain why start-up biotech enterprises and new units in Biotechnology Industry Research Assistance Council (BIRAC) – approved biotech incubators will now not be required to pay a service tax on services provided by BIRAC. Analysts surmise that this exemption could have a direct impact of 14 per cent on the bottom-line of such enterprises, which is quite major for start ups.

Again, as start ups established between April 2016 – March 2019 can seek a 100 per cent profits’ deduction for three out of first five years subject to minimum alternate tax, will we see pharma and biotech companies look at hiving off their R&D teams into R&D start-ups? Would these qualify for such tax breaks? For a detailed analysis from industry leaders (See cover story of the March 16-31, 2016 issue: A mixed bag of reactions, pages 18-23).

A few days after the Budget, Express Healthcare organised Healthcare Sabha, a national meeting conclave focused on public health. While the budget did come up for discussion, public health policy experts discussed a lot more (See report, Healthcare Sabha paves way for public health revolution in India, pages 13-16).

While the budget announcement of health insurance of up to Rs 1 lakh per family would take the nation one step closer to the goal of having universal health coverage, India is at the beginning of this journey. It will take many more steps in this direction before we achieve this goal.

Viveka Roychowdhury
Editor

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