Budget 2015: Awaiting Achche Din

Industry experts share their expectations and wish-list from Budget 2015. FM Arun Jaitley’s first Union Budget for heralding the ‘good days’

‘We hope that the Government will act quickly on major healthcare reforms’

The Organisation of Pharmaceutical Producers of India (OPPI) has high expectations from the upcoming budget with respect to putting in place a robust framework that will help the pharma industry grow and contribute towards tackling India’s health challenges. We are encouraged by the positive statements made on the ambitious health insurance plans, support for research and innovation, consolidated procurement systems and on creating a conducive environment for doing business. We hope that the Government will act quickly on major healthcare reforms and announce more support for this sector in the new budget.

In its pre-budget memorandum, OPPI has proposed budgetary measures and support in the following key areas:

• Direct taxes
• Indirect taxes
• Transfer pricing

Direct taxes

1. The Government should increase the percentage of weighted deduction to 200 per cent from the current 125 per cent for companies that are undertaking scientific research as allowed for the approved specified institutions.
2. In order to attract more investments in R&D activities, government should make provision for weighted deduction of 200 per cent for expenditure incurred outside the R&D units. Expenses on overseas trials, preparations of dossiers, consulting / legal fees for filings in US for new chemicals entities and ANDA (abbreviated new drug applications) should be considered for weighted deduction.
3. Provision should be made specifically for weighted deduction of R&D expenditure in case of companies incurring R&D expenses where a part/whole of manufacturing activity is outsourced. Hence, tax benefits should be provided for units engaged in the business of R&D and contract manufacturing by way of deduction from profits linked to investments.
4. Rural and semi urban areas in India do not have basic healthcare infrastructure. Strengthening infrastructure in such areas involves substantial investments and a long gestation period. A weighted deduction for expenditure incurred in the rural/ semi urban areas should be provided in order to promote investments in such areas.
5. If India has to emerge as a low cost healthcare medical destination, there is greater need to set-up state-of-the-art healthcare facilities in metros, tier I and tier II cities. For achieving this objective, appropriate tax benefits should be granted/extended.
6. There is a need to increase healthcare expenditure (revenue as well as capital) in India. This will happen only when there are investments from both public and private entities. In order to encourage more investments, weighted deduction should be allowed on expenditure incurred by the company.
7. The existing set of rules in GAAR need to be revisited before its implementation. While some of the recommendations of the Standing Committee of Finance for the Direct Taxes Code (‘SCF’) have been accepted, it is proposed that the other suggested recommendations should also be accepted. We recommend that an express clarification should be made in simple and lucid language that the onus to prove avoidance of tax will be on the tax department.

Indirect taxes

1. The Finance Act, 2014 that proposes a mandatory pre-deposit of 7.5 per cent on first level of litigation and additional 10 per cent at second level on duty (if duty and penalty both in dispute) or on penalty (if penalty is in dispute) should be made optional and not mandatory. The assessee should have the option to decide on whether to follow the normal stay procedure or pay the pre-deposit amount upfront. The amount of pre-deposit at 7.5 per cent at the first level and additional deposit at 10 per cent should also be reduced as the amount blocked in the litigation process would be high.
2. The interest payable on delayed payment of service tax should remain 18 per cent, irrespective of the period of delay. The substantial increase in the rate of interest to 24 per cent and 30 per cent in case of default in service tax matters would negatively impact the industry and compel the assessee to pay service tax under protest to ring fence exposure to higher interest payouts. This would trigger blockage of working capital.
3. Service tax should not be levied on R&D /clinical trial services performed in India where the recipient of service is situated outside India. Withdrawal of the service tax exemption on clinical trials or technical testing of new drugs on humans could render the said services costlier. India could lose its competitive edge in the clinical trials global market. Countries such as Malaysia, Bangladesh and Singapore are emerging as new hubs for conducting trials which could hurt the prospects of Indian CROs. Levy of service tax on said services would indirectly impact the cost of medicines also.
4. A large taxpayer unit (LTU) should be allowed to pass on the CENVAT credit to its other registered units.

Transfer pricing

1. The much awaited amendment in respect of roll back of advance pricing agreements (APA) should have detailed guidelines on the following:
   Applicability of roll back benefit (i.e. whether based on an APA application filed on or after 1 October 2014 or an APA which has been concluded on or after 1 October 2014) and option to extend the roll back option to APAs concluded prior to 1 October 2014 as well impact on the on-going assessment/ appellate proceedings of the taxpayer. Applicability of roll back provisions on bilateral APAs. Clarification that penalty should not be levied in case margins of international transaction negotiated under the APA is different/ higher vis-à-vis the price of the international transaction in the previous years as reflected in the transfer pricing documentation
2. The introduction of range concept for determination of the arm’s length price is expected to provide greater flexibility to the taxpayers in respect of setting of transfer price and testing for arm’s length nature as compared to the existing ‘arithmetic mean’. While rules in respect of the same are awaited, detailed guidelines in respect of the scenarios under which the concept of ‘range’ and ‘arithmetic mean’ shall apply, should be prescribed.
3. By Finance Act 2012, the Government notified that the flexibility of the range as was provided in the second proviso to Section 92C(2) cannot exceed three per cent. Limiting the tolerance band to three per cent (one per cent for wholesalers) tends to be extremely restrictive, thereby requiring the taxpayers to be extremely rigid with their pricing which may not be commercially feasible. Thus, the tolerance band should be restored to the earlier limit of five per cent.
4. Local marketing expenditure on global brands should not be subject to transfer pricing audit as these payments are made to third parties for the purpose of sale of products of Indian subsidiary and no associated enterprise is involved in the transactions. Alternatively, it is recommended that a policy is framed to provide for benchmarking of marketing spend by companies for expenses which are routine in nature and for expenses which are of a niche/ non routine nature.
5. The ‘Specified Domestic Transaction’ amendment should be a situation wherein the exchequer does not incur any loss. Other than transactions between a profit making and loss making unit / company and transactions between taxpayers having different tax rates, a corresponding adjustment should be allowed in case of any transfer pricing adjustment in specified domestic transactions.
6. The penalty structure on transfer pricing adjustments requires to be toned down and should be levied only in exceptional cases. The penalty of two per cent is very high and is likely to subject the taxpayers to onerous financial hardship.
7. OPPI proposes issuance of a formal guidance for application of the transfer pricing method whereby, the innovator should be differentiated and not compared with the generics, except where such a comparison is based on a scientifically proven method/ guidelines. Even in such cases, cognizance should be given to the research and development spends by companies.
8. Tax authorities should take into consideration the losses incurred by companies in the start-up year of the company/ year of launch of a product/ molecule and specific guidelines be prescribed to account for the cyclical nature of expenditure. This shall be in accordance with international standards and OECD guidelines.
9. There is conflict between the requirements of Transfer Pricing and Drugs Prices Control Order (DPCO). Transfer pricing regulations may require reducing transfer prices of drugs which would result in reducing end selling prices due to the DPCO rules. Such reduction in prices would ultimately reduce the local margins, thereby beating the very intent of the regulations to optimise local margins. Also, in cases of ‘life saving’ products, the assessee could be compelled to withdraw the products from the market due to poor local margins. Transfer Pricing Regulations should provide for harmonisation with conflicting regulations, in such cases. Alternatively, clarificatory guidelines to the same should be provided.

– Ranjana Smetacek, Director General, OPPI

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‘We are hoping that this year government gives impetus to the burgeoning biotech industry’

We are hoping that this year government gives impetus to the burgeoning biotech industry. There is lack of funding support for biotech companies in India. Indian pharma companies and other corporates should be incentivised to invest their cash surplus in biotechnology research and commercialisation. Such investments by pharma companies and other Indian corporates and SEBI registered venture capital funds for biotechnology should be eligible for the weighted average deduction under section 35(2AB). Biotechnology Special Economic Zones (SEZs) enjoy 100 per cent tax free status, which should be increased from existing five years to 10 years because of inherent regulatory gestation in this sector.

Innovation is the key to bringing effective treatment at an affordable cost to the market. Indian companies are already climbing the innovation curve for new drug discovery. Further to boost innovation in India, current tax incentives of 200 per cent weighted deduction should be increased to 300 per cent with a validity of 10 years. This weighted tax deductions should be applicable to outsourced clinical trials and R&D and include: preparations of dossiers, foreign consulting/ legal fees for NCE and ANDA filings with the US FDA and patent defending charges. When computing the MAT, weight deduction should be allowed under Sec-35 (2AB). as the current rate of MAT is very high (18 per cent, effectively 28.5 per cent including 7.5 per cent surcharge and three per cent cess).

Service tax for the CRO industry is putting Indian companies at a significant disadvantage over some of our neighbours and competitors. Hence elimination or substantial reduction in the service tax, especially for overseas clients paying in foreign currency will benefit the industry at large.

Keeping in mind new government’s make in India campaign, companies must be encouraged to start their manufacturing operations in India. However, the current duty and tax structure acts as a deterrent for local manufacturing as customs duty on complete system is lower than the components for manufacturing and in addition the buyers have to spend additional central excise duty and sales tax on locally manufactured goods making it prohibitively expensive compared to imports. Excise duty and service tax is payable at 12 per cent on input services, whereas the rate for output products is six per cent. Therefore, the inverted duty structure needs to be rectified with suitable amendments to the abatement available.

Medical devices and formulations attract customs duty of 10 per cent. Duty on these products should be rationalised to five per cent. Customs duty on molecular diagnostic products should be exempted / nil rated to enable these tests to become more affordable. Duty exemption is currently available only to notified lifesaving drugs and devices, to be extended to all lifesaving drugs and devices for making the treatment affordable to masses as still in India insurance penetration is low and people have to pay out of their own pockets.

Draft GST Bill should be released on passing of the constitutional amendment bill in Parliament, to enable industry transition to the GST regime. GST is expected to rationalise cost by bringing in supply chain efficiencies.

– Sujay Shetty, India Pharma Life Sciences Leader, Partner, PwC

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‘Give incentives to R&D-driven firms, slash excise duty on APIs by half’

Venus Remedies, research-based global pharmaceutical company, seeks incentives for R&D-driven firms, safe harbour provision for generic exporters, reduction in excise duty on active pharmaceutical ingredients (APIs).

We expect the government to boost the manufacturing sector and regulate it by making GMP compulsory. It should introduce some new policies to create a business environment to enable mid-cap Indian companies like Venus Remedies to match international standards and compete globally.

The healthcare authorities should focus on promoting R&D in the pharma sector, particularly the in-house R&D undertaken by Indian companies. This will help India come up with low-cost innovative solutions in critical care segments like anti-microbial resistance and oncology.

Since the pharma sector is export-driven to a large extent, it is exposed to fluctuations in pricing. As of now, big pharma companies opting for contract research are getting benefited from the relaxed transaction limit for availing the safe harbour rule facility. Since the safe harbour provision could prove to be a credible alternative for generic players with major exports to avoid transfer pricing disputes, the government should extend the safe harbour rules to them so as to reduce the cost of compliance and litigation.

The central excise duty on active pharmaceutical ingredients (APIs) should be reduced from 12 per cent to six per cent, as in the case of certain formulations. The higher rate of central excise duty on APIs as compared to the formulations has been resulting in accumulation of cenvat credit for manufacturers dealing only in domestic markets and those with minimal exports. Furthermore, as there is no provision for pharma manufacturers to get the accumulated cenvat credit refunded, it is eventually adding to their expenses. As clinical trials are a fundamental requirement before introducing any research product in the market, all the costs incurred on these trials, whether in India or overseas, should be part of the R&D costs under Section 35(2)-AB of the Income Tax Act. The government should also devise a system to speed up the process of regulatory approvals for clinical trials and marketing.

On the tax exemption front, MAT rate should be reduced and units in backward zones like Himachal Pradesh and Sikkim should be excluded from MAT. This will boost R&D in pharma companies as the reduction in MAT rate and exemption from MAT for units located in backward areas would help pharma companies generate healthy profits.

Pharma is an export-oriented industry, and in the wake of global economic uncertainties, exports need some incentives. Export-based deductions, like under the erstwhile Section 80 HHC, should be reintroduced.

– Pawan Chaudhary, Chairman and Managing Director, Venus Remedies

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‘Government can do is to give a consistent and predictable policy environment’

The pharma industry in India has been on a roller coaster ride for the past few years with issues such as expanding span of price controls, weak enforcement of IPR and increasingly stringent yet ambiguous regulatory environment. While the Union budget has limitations in addressing some of these issues, the least Government can do is to give a consistent and predictable policy environment so as to plan the business for longer term rather than tinkering with taxes and duties every year and to offer few sops to balance the books. The first full budget of the BJP government is being eagerly awaited not only by the corporates but also by the Aam Aadmi for the Achhe Din to finally arrive. The first humble request to the Finance Minister is to shun verbosity and keep it short and simple. His first maiden budget with a record 253 paras and with a health break has broken all previous records of budget speeches. Hope this performance is not repeated.

Now that Make in India has become the national anthem of the new government and the entire WEF town of Davos is plastered with Make in India billboards and Indian Adda is renamed Make in India lounge, the budget should give impetus to this initiative. To begin with, the corporate tax for domestic companies should be reduced to 25 per cent from 30 per cent and MAT to a reasonable rate of 15 per cent from 18.5 per cent. We have seen what has happened to the SEZ concept which was touted as a game changer for manufacturing. Today, less than 48 per cent notified SEZs do any manufacturing activity and they have just become a tool for real estate players. Secondly, logistics plays a very important role in pharma distribution and supply chain which has always been a challenge due to poor infrastructure and multiplicity of state and central taxes, and their cascading effect. This is compounded by the fact the many medicines require cold chain storage and most of them have limited shelf life.

GST would have changed all this but it looks like we will have to wait till April 2016 till all states come on board. DTC is another area which needs urgent attention. CBDT has recently notified safe harbor rules for sectors like IT/ ITES, KPO, auto component manufacturing etc. Similar guidelines should be extended to pharma companies exporting and manufacturing products as contract manufacturer. The new companies Act now mandates that certain class of companies should spend two per cent of their average net profit on CSR. Since this activity is meant to benefit the society and not the company, it should be made tax deductible.

Not long ago India was considered a destination of choice for conducting clinical trials on new drugs. Unfortunately this is no longer so. Clinical research activity which is fundamental to drug discovery is down almost by half. While the budget has limitations in correcting this situation, the least government can do is scrap the service tax on CROs which was a major setback for them to remain competitive. Pharma industry is science based and innovation is at the core of its growth strategy. To encourage discovery research all expenditure on R&D whether carried out in house or outside, weighted deduction under u/s 35 (2AB) should be enhanced to 250 per cent from 200 per cent for a period of 10 years i.e.up to 31st March 2024.

All areas of discovery research such as clinical trials, patent filing, contract research, BA/BE studies etc. should be tax exempted to foster conducive environment for drug discovery research. India’s bulk drug industry is on the verge of collapse. While we are proud of being called Pharmacy of the word, our growing dependence on Chinese imports for APIs is going to severely affect the industry in the long run and needs urgent intervention. Today out of 348 APIs of essential drugs only about 50 are manufactured in India.

Pharma are integral part of healthcare value chain. The FM in his maiden budget announced creation of one AIMS type institute in every state. Time has now come to at least start laying foundation stones for this initiative. Our former ‘Accidental Prime Minister promised to increase the Government’s healthcare spend to at least 2.5 per cent of GDP as against one per cent presently allocated. Instead, Nadda the new Health Minister recently announced a massive cut of Rs 6000 crore in the healthcare budget citing non utilisation of allocated funds and simultaneously announcing that no flagship programme will get affected. Lastly, no more aggressive taxation and retro tax. We have now world class economists like Arvind Subramaniam, Raghuram Rajan, Arvind Panagariya, Bibek Debroy advising the government. All the Government has to do is listen to them with its ears and mind wide open.

– Dr Ajit Dangi, President & CEO, Danssen Consulting