Pharma sector expects a sweet pill from budget 2017

Even though phasing out of incentives were announced in the past only with an intent to achieve lower corporate tax rates, given that India still needs considerable advancement in the R&D sphere, pruning such kind of tax incentives would dampen the investments in this sector. Moreover, if the weighted deduction concept is also extended while computing the minimum alternate tax, pharma companies would get a good boost thereby attracting more investment in the sector.
 

Further, in line with the government’s aim to provide tax certainty and create investor friendly tax regime, it is expected that the existing provisions would be specifically clarified to allow weighted deduction for expenditure on the outsourced scientific research. Certainly, some measures would need to be introduced to keep a check on such outsourced activities. This is needed because in many cases it may be commercially viable for companies to outsource the scientific research. 

A slight rationalisation of the safe harbour margin for R&D services relating to generic pharmaceutical drugs would also lead to reduced litigation and minimize the resources invested by tax payers and revenue authorities in advance pricing agreement and mutual agreement procedure proceedings. Moreover, while the patent box regime (ie, concessional tax regime for patents developed in India) which was introduced last year has been a welcome move, the language of this beneficial provision does not appear to be in sync with its objective (ie, to encourage indigenous R&D activities and to make India a global R&D hub). 

Currently, the benefit of patent box regime is restricted to ‘true and first inventor of the invention’. One would hope that the language is modified to ensure that in cases of joint patentees (especially where one of the joint patentee is a firm/LLP/company), the benefit of this regime is extended to the assignee of the true and first inventor.

The pharma companies did experience a blow in the past when CBDT clarified in a circular that expenditure on freebies provided to medical practitioners in violation of applicable regulations are inadmissible. Practically, the pharma companies are facing lot of hardships and heat on this account, as even genuine expenses incurred by them say towards sponsorship of events organised by medical associations, medicine samples provided to practicing doctors incurred are being disallowed by the tax officers due to the wide overarching powers granted to tax officers under the said circular. A clarity to exclude such genuine expenses should be provided for.

To conclude, Indian pharma sector has had its fair share of challenges, be it the ban (though, now struck down) of many FDC (fixed dose combination) drugs or the constant encounters faced by it in relation to IP protection. Thus, it is vital that the union budget 2017 presents some tax sops to all the stakeholders of this sector: the pharmaceutical companies for its above wish list, and the patients by increasing the limits for deduction on mediclaim and expenditure incurred on medical needs.

Lastly, on the manufacturing front, one also hopes that the union budget 2017 increases the fold of investment allowance (under section 32AC of the Income-tax Act, 1961) to non-corporate assessees for the pharma sector. It is extremely important that the pharma sector is offered the necessary impetus to boost the growth of this sector, being one of the key sectors of the government’s ambitious ‘Make in India’ campaign.

________________________________________________________________________________________________

Vinita Krishnan is associate director from Khaitan & Co, Mumbai 

Raghav Kumar Bajaj, senior associate from Khaitan & Co