This budget would be the last full-fledged budget of the Narendra Modi-led government before 2019 elections and like other sectors, Indian pharma industry too has high hopes from this government. Industry stakeholders share their expectations
Weighted deduction on R&D should be continued
Here are some of the key expectations from a pharma/ healthcare personal tax standpoint:
Increase in tax-free medical expenditure reimbursement from employer to employee: The current limit of Rs 15,000 per annum (pa) of tax free reimbursements for medical expenditure from employee to employer was last revised almost two decades back (i.e. in 1998). With significant increase in healthcare costs this limit may be considered to be atleast doubled to Rs 30,000 pa.
Deduction for medical expenditure: Currently deduction for medical expenditure incurred is restricted to Rs 30,000 and allowed only where such expenditure is incurred for very senior citizens (above 80 years of age) who do not have a health insurance policy. Considering that a large mass of Indian population have limited access to even basic healthcare facilities, this deduction may be considered to be allowed to all taxpayers where they do not have any health insurance policy. From a direct tax perspective, the following may be considered:
Weighted deduction on R&D: For a sector witnessing unprecedented pressure, not only on the export front but even locally, weighted deduction on R&D should be continued. Further, weighted deduction is allowed only on expenses incurred in a recognised in-house R&D facility. However, there are certain expenses necessitated by the industry’s business that are incurred outside this R&D facility: such as clinical trials, patent approvals, overseas trials, preparation of dossiers, etc; these should ideally be eligible for weighted deduction. Considering the gestation period with regard to R&D and that benefits, if any, are available after long gaps, unutilised R&D weighted deduction should be available for carry forward for at least 10 years (if not more) and weighted deduction should be allowed while computing book profits under MAT provisions. Indigenous R&D (Patent) – option should be given to the resident taxpayer to avail benefit of concessional tax regime or opt out of the same.
Secondary adjustment
A deemed dividend approach should be followed in case of secondary adjustment (followed in the US and Germany) rather than a deemed loan approach, since under the former only a one-time payment is made which can be settled without a carry forward impact; the key challenge under the latter being – difficulties in accounting treatment. Alternatively, if the deemed loan approach is to be followed, then interest payment should be restricted to be a one-time payment. Limitation on deduction of interest under Section 94B relating to thin capitalisation. It is recommended to delete the word implicit guarantees to ensure ease in application of Section 94B(1).
– KPMG India
One can expect increased government spending in health sector
While the regulatory aspects of this sector are extremely critical to ensure effective compliance with the laws, what the Indian pharma industry needs the most is a significant fiscal incentive from an income-tax perspective.
What pharma sector needs
Last year, apart from announcing two new AIIMS (at Jharkhand and Gujarat), the Union Budget did not offer any significant tax breaks to the pharma sector. Thus, this year, being the last full budget before next general elections, pharma sector is all-fingers-crossed in hopes for a major fiscal boost. Considering that the government is implementing several schemes for betterment of the healthcare of different sections of the society which would need the support of manufacturing, one hopes that Union Budget 2018 announces a pan-India investment allowance for setting up factories/ units to manufacture pharma sector related inputs.
Secondly, the amendment which has reduced the weighted deduction (i.e. giving a tax break for more than what is spent) for expenditure incurred in relation to scientific research and eventually discontinue the same should be rolled back. This is because though the government’s objective to gradually phase out all fiscal incentives and ultimately lead to an overall reduced corporate tax rate is acceptable, given that scientific research is the most essential tool for the growth and progress of pharma and healthcare sector, this sector needs to be distinguished from the general corporates at least on this account. Moreover, currently, the weighted deduction concept is only applicable in relation to computation of income under the normal provisions of the Income Tax Act and not for computing the minimum alternate tax (MAT). To make this incentive more effective for this industry, the benefit of the aforesaid deduction should also be extended for computing the MAT.
Another aspect which needs to be expressly clarified is in relation to weighted deduction for expenditure on the outsourced scientific research. Given that in many instances, for better efficiency and for making use of the specialists, research activity is outsourced, it would be appropriate to clarify that the weighted deduction expenditure in relation to scientific research would be available even for outsourced scientific research. Needless to say, to prevent the misuse of this provision, suitable safeguards may be provided in the law itself.
In order to incentivise inventions and patents, the patent box regime (i.e. concessional tax regime for patents developed in India) was introduced in 2016. While the intent and object of this beneficial tax regime – to encourage indigenous R&D activities and to make India a global R&D hub – is undoubtedly clear, the language used in the statute book does not appear to be in sync. Currently, the benefit of patent box regime is restricted to ‘true and first inventor of the invention’ – even in case of joint patentees. Under the patent laws, where a company incurs expenditure and develops a patent with its employee, the company cannot be a ‘true and first inventor’. As a result, despite having incurred the development expenses in relation to the patent, the company (being the economic owner of such patent) may not be able to claim the benefit of this provision. Therefore, one would hope that the language is modified to ensure that in cases of joint patentees (especially where one of the joint patentee is a firm/ LLP/ company), the benefit of this regime is extended to the assignee of the true and first inventor.
On the litigation front, the root cause of controversy in a significant number of cases in the pharma industry has been a CBDT circular which provided that expenditure on freebies provided to medical practitioners in violation of applicable regulations do not qualify for set off against taxable income of pharma companies. As a result of this circular, the pharma companies are facing significant hardship and protracted litigation, as even genuine brand building and business promotion expenses incurred by them, say towards sponsorship of events organised by medical associations, medicine samples provided to practicing doctors, conducting awareness programmes etc, are being disallowed by the tax officers on the basis of wide reading of the CBDT circular. Thus, clarity should be provided to exclude such genuine expenses from the purview of the said circular.
As per Economic Survey 2016-17, the annual expenditure by government (Central and State Governments combined) on health as percentage of GDP for last three years has been below 1.5 per cent every year. The National Health Policy 2017 envisages increasing expenditure by government on health to 2.5 per cent of GDP in a time bound manner by 2025. Given that this year, it is the last full budget before next general elections, one can expect increased government spending in this sector. One hopes that increased allocation to this sector is in the form of tax breaks and fiscal incentives, as such measures offer an economic benefit for the present, and lead to capacity building for sustainable growth as well as development of the sector.
– Ritu Shaktawat, Associate Partner & Raghav Kumar Bajaj, Senior Associate, Direct Tax team, Khaitan & Co.
Budget 2018 should consider nil GST on medicines/ devices
Globally tomorrow’s challenge is to develop new medicines that can prevent or cure currently incurable diseases and address unmet medical needs. Mortality rates from major diseases including heart disease, cancer and stroke are down dramatically. Most drugs on the market in developed economies have