Budget 2017: Weighted deductions for incurring pharma R&D should continue

Hitesh SharmaThe demonetisation scheme announced by the government in November 2016 and its effects on the economy over the last couple of months has made the Union Budget 2017 an eagerly awaited event. Many believe that with the US and many nations in Europe undergoing a transition in power and thereby, in policy, this Budget could play a critical role in pushing India’s standing as a global innovative economy. The pharmaceutical sector has been one of the key sectors in the shaping up of the Indian economy and it will continue playing a major role in its development. The Government has realised its importance and has introduced a number of policy initiatives in the past in order to boost the sector. India is the largest provider of generic drugs and the growth of the Indian pharmaceutical industry is expected be nearly 3 times the growth of the global pharma industry. One of the major reasons for this high growth is the low labour cost, with the cost of labour in the country nearly half of that in the US or Europe. Some of the general tax expectations of corporate India relate to providing a definite roadmap for reduction of the corporate tax rate and elimination of MAT. This article lists down some of the key tax expectations of the pharma industry from Budget 2017. Boost to innovation and simplification of the law and reduction in litigation are the key themes emerging from these expectations. Boost to innovationInnovation is one of the most critical aspects necessary for the pharma industry to survive and thrive. In order to enable innovation, it is important to encourage corporate spending on research and development. While the patent box regime has been introduced to encourage innovation, it may not necessarily encourage corporate spending on the R&D as the provisions of the patent box regime would apply only in case of successful registration of patents and would not apply in cases where the research has not been successful or fruitful. Therefore, in order to encourage spending on R&D, it is imperative that the weighted deductions provided for incurring R&D expenditure continue and not be phased out. In respect of the patent box regime, the beneficial regime needs to be fine-tuned in order to ensure that it achieves its objective of fuelling innovation. Currently, the patent box regime applies only to royalty income and would not apply to a taxpayer who uses the patent for in-house manufacturing. In order to ensure that all the taxpayers who have registered their patents get the benefit of the regime, the regime should be extended to taxpayers who sell their products using the products developed by them in-house and registered by providing a certain pre-determined portion of the income from sale of goods exempt from tax. Further, the beneficial regime, currently applied only for income by way of royalty, should also be extended to income from transfer of patents developed and registered in India. Currently, R&D/clinical trial services performed in India are liable to service tax at the rate of 15% even when the recipient of service is situated outside India. In order to lower the cost of provision of such services and to boost innovation in the country and make such services globally competitive, it is important to provide for some sort of exemption from indirect tax on such services.Simplification and reduction of litigationThe industry has seen increased litigation in respect of deductibility of expenses incurred by pharma companies for sponsorship of various events involving doctors. The tax department is referring to the MCI Guidelines, which prohibits doctors from accepting freebies, while disallowing such expenses as not permitted under law in the hands of the pharma companies. While there are contrary judicial precedents in this regard, there is a need to provide certain clarity as to whether the MCI Guidelines apply to pharma companies in light of the impending mandatory code to replace the optional UCPMP in order to cut down on unnecessary litigation.Other expectationsToday, one of key issues facing the pharma industry has been the overdependence on China for import of active pharmaceutical ingredients (‘API’), which are used as raw materials for the manufacture of pharmaceutical products. Therefore the need of the hour is to boost manufacture of APIs in the country by providing incentives in the form of tax incentives, subsidies, etc., which one hopes is announced in the upcoming Budget.Moreover, in order to attract foreign investment and achieve the objective of making India one of the top 3 players in the pharma sector by 2020 and an innovation hub, it is important that the FDI limit in brownfield projects should be increased to 100% under the automatic route.Further, while the roll-out of GST has been postponed to July 2017, one hopes that adequate time is provided for its implementation in order to address operational issues such as loan licensee related job work transaction, treatment of expired goods, transitional provisions related challenges etc.Lastly on the policy front, while one would need to wait to measure the success of the Jan Aushadi Scheme, one hopes that the government implements the setting up of the pharma parks announced earlier and announces certain R&D policy incentives in order to provide a boost to the industry. To conclude, one can expect some major reforms in this Budget which could have an impact on the Indian economy for many years to come.The author is Tax Partner & National Leader – Lifesciences, EY IndiaRahul Kakkad, senior tax professional EY has also contributed to this articleViews expressed are their personal