OPPI’s recommendations are as follows:
Weighted Tax Deduction
Section 35(2AB) of the Income Tax Act, 1961 makes provisions for weighted tax deduction in expenditure incurred on scientific research. The current provisions for deduction u/s 35(2AB) are restrictive in nature and cover expenditure incidental to research carried out at an in-house approved R&D facility. Some of the activities though directly related to R&D are not eligible for weighted tax deduction such as clinical trials carried out in hospitals and institutions outside the approved R&D unit.
R&D is a segment which can become a key enabler of growth, for the Indian pharmaceutical sector. To encourage investments in R&D, any expenditure related to research carried out in the in-house facility i.e. clinical trials, bioequivalence studies, regulatory and patent approvals should be eligible for weighted tax deduction, even if these activities are conducted outside the approved R&D facility including overseas expenditure. There are no specific tax benefits available to units engaged in contract R&D or undertaking R&D for group companies. Benefits should be provided for units engaged in the business of R&D and contract R&D by way of deduction from profits linked to investments.
CBDT Circular no. 5/2012 on taxing freebies to doctors
Through the circular no. 5/2012 of the Central Board of Direct Taxes (CBDT), the Union Finance Ministry brings under the purview of income tax any expenditure incurred by way of provision of freebies to doctors.
There is already a mechanism in Section 37(1) of the Act that disallows expenses which are personal or illegal in nature. Any expenditure incurred by way of provision of freebies to doctors is inadmissible under Section 37(1) of the Income-tax Act, 1961 (‘the Act’) being an expenditure prohibited by law as per MCI Regulations. The circular, in its current form, is unclear on the scope of expense applicability and manner of administration. There is widespread ambiguity in the pharmaceutical industry and laying out such generic guidance would add to the confusion and lead to significant hardship to the taxpayers as it shall provide discretionary powers to the Assessing Officer (AO) thereby opening floodgates of unnecessary and unwarranted litigation.
The Circular should be linked to violations of Uniform Code of Pharmaceutical Marketing Practices for Indian Pharmaceutical Industry (UCPMP) as and when it becomes mandatory. Till such time, the circular should be kept in abeyance. As an another interim measure, the CBDT may consider constituting a panel with adequate representation from the Revenue, Department of Pharmaceuticals and Trade to define which expenses would be considered as ‘ethical’ or ‘unethical’ (e.g. samples, conferences, etc.) and lay down guidelines for implementation.
Tax holiday
India’s healthcare infrastructure is lagging behind when compared with other developing countries. There exists a huge gap between demand and supply of healthcare infrastructure facilities available in the country. To achieve a desired bed density of two per 1000 population by 2025, investment to the tune of $86 billion would be required, a bulk of which is likely to come from the private sector or FDI going by the current figure of 74 per cent contribution coming from the non-government sector.
Further, for India to emerge as a low cost healthcare tourist destination, there is a greater need to set-up state-of-the-art health care facilities in the metros, Tier-I and Tier-II cities in India. In view of huge capital outlay for set-up, hospitals may take four to five years to breakeven and hence not be able to obtain the benefit of tax holiday.
Therefore, it is necessary to extend the tax holiday benefit to hospitals set up in such urban areas to enable companies to commit substantial investments required in the healthcare sector.
OPPI recommends that Budget 2014 extend to certain urban areas, the 100 per cent deduction, currently granted to an undertaking deriving profits from business of operating and maintaining a hospital located anywhere in India. The above deduction which is available to hospitals under Section No. / Rule No.: 80-IB (11C) for five consecutive years from the previous year in which hospital starts functioning should be increased to 10 years. Another measure that can be adopted is to grant an option to the hospitals to select five consecutive years from initial 10 years of commencement.
Additionally, the current tax holiday is available only to hospitals which had started functioning before March 31, 2013 (except in urban areas). In order to incentivise the companies to continue setting up and operating hospitals, it is imperative for the tax holiday to be extended to hospitals that started functioning after March 31, 2013.
FDI –Ambiguity on coverage (e.g. whether allied activities such as R&D, clinical trials are covered).
Currently, there are no specific guidelines laid down on whether the FDI provisions are applicable to pharma companies undertaking allied activities eg. R&D, clinical trials etc.
It is imperative to create an environment conducive for facilitating investments into the sector, by providing clarity on the FDI permitted in different areas in the pharma sector and extending the provisions to all allied activities.
Excise Duty on APIs
The Union Finance Ministry levies 12 per cent central excise duty (plus three per cent cess) on active pharma ingredients (APIs), whereas the formulations is subject to central excise duty of six per cent (plus three per cent cess). This inverted duty rate structure has resulted in huge accumulation of Cenvat Credit for manufacturers especially those who are not engaged in exports or have minimal exports and cater only to the domestic market.
The higher rate of central excise duty on inputs namely API as compared to the duty on finished goods manufactured thereof (i.e. formulations) has led to accumulation of Cenvat Credit for the Indian pharma formulation manufacturers as the duty paid on inputs cannot be set off against the output central excise duty liability in spite of value addition on finished goods. Further, there is no provision for refund of the accumulated Cenvat Credit, which eventually appears as an added cost to the manufacturer.
OPPI recommends that the excise duty rate of API be rationalised and brought to par with pharma goods i.e. excise duty on the inputs (API) should be reduced from 12 per cent to six per cent. Alternatively, the Government may introduce a refund mechanism to enable pharma manufacturers to avail refund of excess Cenvat Credit especially in case of such an inverted duty structure.
Other expectations
- Adoption and implementation of uniform marketing guidelines (eg UCPMP)
- Rationalisation of clinical trial guidelines
- Updation of governing laws such as Drugs & Cosmetic Act to reflect the current industry scenario
- Stakeholder consultation while introducing and implementing drug pricing guideline.
– Ranjana Smetacek, Director General, Organisation of Pharmaceutical Producers of India (OPPI)