The election of a Government with a majority and a more development-focussed election battle underlines the expectation which the electorate has vested in the new administration to make bolder changes to provide the economy with the much needed impetus. Equally the new Government has put healthcare sector as a high priority thrust area and has indicated health assurance to all Indians and to reduce out of pocket spending on healthcare with the help of State Governments.
Listed below are some of the key tax expectations which the Finance Ministry may want to target through the Budget for the Life Science Industry:
Incentives for expenditure incurred with regard to R&D activities
The constantly evolving environment makes it vital to provide impetus to R&D activities. While there are provisions to claim a deduction for inhouse R&D expenses, there are no specific tax benefits for contracted R&D or undertaking R&D for group companies. Through the Budget the Government should aim to provide a deduction on all R&D activities enabling greater flexibility in claiming benefits. Further, significant expenditure is incurred on legal/consulting fees for filings in USA for NCE (new chemicals entities) and ANDA (abbreviated new drug applications, preparations of dossiers, etc. for defending patent rights. The same should also be allowed as tax deduction.
Expenditure on freebies to doctors
Pharmaceutical companies use sponsorships, grants, etc. for educating, creating awareness of new medicines/ technologies among the doctors. Medical Council of India has prescribed regulations for such activities which are not permissible to be undertaken by healthcare practitioners. In this regard, the Central Board of Direct Taxes has issued a circular, disallowing such expenditure incurred, said to be in violation of law. However, the circular is vague on the scope of expenses and manner of administration leaving the same to the discretion of tax officers on matters to which their expertise does not extend, leading to unnecessary litigation. In this regard, the Government could seek to rationalize provisions by providing greater clarity for claim of expenditure.
Rolling out GST
Rolling out the long pending GST provisions would bring cheer – reducing prices, as transactions would be devoid of cascading effect of taxes and providing greater certainty for doing business.
Specified Domestic Transaction (‘SDT’)
- The Government should aim to harmonize provisions under International Transfer Pricing and Transfer Pricing for SDT with respect to related parties and associated enterprises.
- It is challenging to benchmark managerial remuneration, hence, the same should be excluded from the applicability of SDT provisions.
Safe Harbour Rules (‘SHR’)
- The SHR have not defined the term ‘generic pharmaceutical drugs’. In this regard, while there is a clear intent through the SHR to include R&D activities with regard to generics (comprising the final product) and drugs (which mainly comprise of APIs, etc.), there seems to be an ambiguity. Accordingly, the Government should look to clarify that SHR covers R&D on both drugs and generics.
- While it is accepted that SHR propounds higher margins than the standard arm’s length price, the SHR margin of 29% on Contract R&D seems higher than prudent and should be revised downwards.
Margin requirement regulations
Companies involved in import of products from related parties are required to comply with transfer pricing provisions – maintaining higher margins/lower import prices while Customs Regulations require higher import prices. Accordingly, the Budget should seek to harmonize the provisions.
No provisions for claim of refund on underutilization of CENVAT Credit
API (used in manufacture) is excisable at 12.36%, however, output attracts excise at 6.18% leaving the differential as cost to manufacturer. The Budget must seek to rationalize duty structure or allow refund on the balance amount.
Greater abatement for excise medicaments
Medicaments were allowed an abatement of 35% since 2008. However, the same is insufficient when taking into account industry costs and the Government must seek to increase this to 40 or 50%.
Reduction in the rate of customs on life saving drugs
High rates of customs on life saving drugs and equipment have made them expensive. Bringing duty rates down on critical lifesaving drugs and equipment would bring down costs making treatment for critical ailments less expensive.
Increased deduction on medical expenses
The income tax law was revised in 1998 to increase the amount of reimbursement allowance from INR 10,000 to INR 15,000. It would be a welcome proposal to enhance the amount of non-taxable reimbursement, given that the previous revision took place 16 years ago. Further, benefit to taxpayers should be provided by linking the availability of the said allowance to the city in which the taxpayer resides (similar to the allowance already available under the income-tax law in the case of house rent allowance).
Tax Deductions for Hospitals
Currently 100% deduction is available for new hospitals set up in India (other than in certain urban areas) for a period of 5 years. Given the gestation period that a hospital in a non urban area takes to break even, there is not much tax benefit that an assessee derives. This is an important mechanism to create healthcare infrastructure. Also there could be a huge medical tourism potential in this area. The Government should consider making the incentive also available in urban area. Also the 5 year period should be extended to 10 years or the hopitals should be given an option of selecting 5 consecutive years in a block of 10 years of commencement of the hospital facility.
To conclude, there can be little doubt in the potential of the Indian Life Science industry to contribute to national growth and its need for smoother and clearer policy not just from tax but also on regulatory standpoint. Hence, it would be interesting to see the changes the Government wishes to impose through the upcoming Budget.
(Views expressed are personal)