PRE-BUDGET RECOMMENDATIONS 2013-14 — Hitesh Sharma, Tax Partner & National Leader – Life Sciences Services, Ernst & Young

Hitesh Sharma

The Indian pharmaceutical sector promises to be one of the fastest growing segments of the Indian economy and its future outlook is distinctly upbeat. Globally, pharma companies looking for new growth opportunities have realised that some of the most promising are to be found in the world’s most emerging economies like India. With the Union Budget 2013-14 around the corner, this article focuses on the various fiscal measures which could act as key catalyst to fillip growth in the pharma sector.

It is seen that, within the pharma sector India is well positioned on the manufacturing front. However, a lot needs to be achieved in the arena of research and development. With research driven business becoming the business model for the industry, it is imperative for the Government to provide much desired impetus to promote higher spending in research. This can be done firstly by proving full exemption from excise and custom duties on inputs required for R&D activities. Secondly, providing weighted deduction to units engaged in contract research activities and clinical research organisation. Lastly, allowing weighted deduction in respect of expenditure incidental to research carried outside the R&D facility in India or in any foreign country.

On the transfer pricing domain, there is immediate need to frame guidelines to provide benchmarking of Advertising, Marketing and Promotion (AMP) spend by the companies especially to avoid unwarranted litigation on account of recent practice of adjustment followed by tax authorities which follows that AMP results in creation of marketing intangible to the benefit of the brand owner. Additionally, there is a need for formal guidelines for application of CUP method whereby the innovator should be differentiated from the generic, except where such comparison is based on scientifically proven method. Also, there is an urgent need felt for introduction of safe harbour rules to abbreviate the increasing disputes between the revenue department and taxpayers over understatement of profits in international transactions between two related firms.

The Government should consider providing weighted deduction in respect of expenditure incurred on taking product registration outside India. Separately, with technology advancing at a faster rate, it is imperative to provide for a faster amortisation rate in respect of medical/ pathological equipments and devices. Accordingly, the Government should consider raising the depreciation rate on medical/ pathological equipments and devices from existing 15 per cent to 60 per cent.

Considering the prevailing cost of medicine, it is imperative to raise the limit of non-taxable reimbursements to employees to be in line with the medical cost realities.

There is an immediate need for clarifications on the scope of recently introduced circular by CBDT on inadmissibility of expenses incurred in connection with medical practitioners by pharma and allied health sector industry. Although the circular has been introduced to disallow unethical payments by pharma and other allied healthcare companies, it is unclear in its current form on the scope of expenses sought to be covered which may lead to wide spread ambiguity amongst the pharma industry thereby defeating its purpose and opening the floodgates to unwarranted litigation.

With a view to make available healthcare facilities in rural areas, which require huge capital investments, the Government should consider providing a weighted deduction for expenditure incurred in rural areas. Separately, the Government could put in place a public private partnership model for establishing healthcare infrastructure in rural areas, which could involve subsidies in the form of funding partial construction costs, providing land at reduced prices and exemptions on import of materials.

On an indirect tax front, the inverted duty structure of raw materials vis-à-vis pharma formulations resulting into accumulated Cenvat credit at the manufacturing locations continues to be perennial concern for the industry. Typically the raw materials (namely Active Pharmaceutical Ingredients – API) attract higher excise duty @ 12.36 per cent whereas the finished pharma formulations attract excise duty @ 6.18 per cent leading to accumulation of credit in the books which generally would be a cost to the company. There is an urgent need for the Government to bring relief by way of refund mechanism to address the said issue.

The negative list of services regime introduced with effect from. July 1, 2012, has brought along with its own set of challenges to the industry.

Testing and analysis services were covered under the recipient-based category for export/ import of service since 2011. However, with new set of rules, this position has changed to performance-based category. This would imply that testing or analysis activity done in India on goods provided by overseas recipient would be subject to service tax even if the recipient of said services is located outside India and the consideration is received in foreign currency. It is on the industry’s wish list that Budget 2013 would bring relief by suitable amendment in the Place of Provision of Service Rules, 2012.

Additionally, the amended definition of ‘input service’ under the Cenvat Credit Rules, 2004 is likely to give rise to many interpretational issues with the field authorities denying credit on all legitimate business expenditure which have not been specifically provided for in the said definition due to deletion of the phrase ‘activities relating to business’ from the definition of input services. An amendment to the said definition is the need of hour to mitigate exposure to litigation on this ground.

To conclude, it is expected that the upcoming budget shall contain the necessary sops to make the economy of the country healthier. It shall be closely watched as to how best the present government can meet the expectations with ground realities, as the forthcoming budget sets the platform for the Government to deliver the much needed (and much awaited) stimulus for the economy.

(Rahul Patni, Associate Director-Tax & Regulatory Services, Ernst & Young contributed to the article)

* Views expressed are personal