The Indian pharmaceutical industry expects the government to restore the tax benefit offered on research and development expenditure in the upcoming Union Budget 2019.
The industry also hopes the government will announce incentives in the budget to encourage setting up bulk drug manufacturing units in the country, in addition to scale-up of spending on healthcare.
Finance Minister Nirmala Sitharaman will present the budget on July 5.
“We have been saying over a period of time that India must move from predominantly generic drugs industry to discovering and developing new drugs; for that the government should go back for tax exemption from 200 percent of R&D,” said Sudarshan Jain, Secretary General of Indian Pharmaceutical Alliance (IPA), the industry body that represents large domestic pharmaceutical companies.
The government had introduced a weighted tax deduction of 200 percent on company expenditure on in-house research and development (R&D) in the 2010 budget, in order to boost innovation in the country. In weighted tax deduction, double the amount spent on R&D is deducted from the profit of the company providing them additional cash to invest in R&D.
While the tax incentive isn’t specific to the pharma industry, but pharmaceutical companies have been major beneficiaries as they have increased their average R&D spend from 5.3 percent of revenue in FY12 to 8.5 percent in FY19.
However, the 200 percent weighted deduction on R&D was short-lived, with the government in 2016 Budget cutting it to 150 percent from 2017 onwards and to 100 percent from 2020 onwards.
It came as a rude shock to the pharmaceuticals and life sciences industry.
To allay industry concerns the government in the same budget announced a patent box-type of incentives for the first time, wherein income received by Indian companies in the form of royalties and technology license fees would be taxed at a reduced rate of 10 percent from the fiscal year 2016–2017 onwards. The government said this move was designed to stimulate innovation by raising the revenue that companies could earn from their intellectual property.
But it didn’t benefit Indian companies much, as the money they make on royalties and technology license fee isn’t that significant to make up for loss due to cuts in R&D tax breaks.
Sudarshan also expects an increase in healthcare spending in the direction of the 2.5 percent of the Gross Domestic Product (GDP) mentioned in the National Health Policy. The current spend on healthcare remains just a little over 1 percent of GDP.
The budgetary allocation on healthcare as a percentage of the total budget also remains low at 1.98 percent.
The pharmaceutical and healthcare start-ups are asking for the complete elimination of Angel Tax.
“At the policy level, the ruling government has already drafted e-pharma norms after due diligence. Once a legal framework is set, medicine delivery and other health-tech startups will be able to operate within a conducive environment. A quick implementation will, in turn, ease the bureaucratic process and facilitate fundraising activities for healthcare and health-tech startups," said Pradeep Dadha, Founder and CEO, Netmeds.com.
Indian pharmaceutical industry has expanded at a rapid pace over the last two decades, with revenues touching $38 billion. A significant chunk of it comes from exports, mainly to highly regulated markets such as the US and Europe.