The pharmaceutical industry has high expectations from the Union budget this year, considering that no major indirect tax reliefs were announced for the industry in last couple of budgets. It is anticipated that this year, the budget may provide more specifics on the ‘Make in India’ initiative.
In fact, to promote manufacturing of active pharmaceutical ingredients (APIs) in India, the Department of Pharmaceuticals declared 2015 as the ‘year of APIs’. The government was expected to introduce several industry-friendly policies and incentives to provide a major push to the growth of the Indian bulk drug industry for it to be a formidable force globally. However, no major tax reforms (especially on the indirect tax front) have been announced by the government yet.
As a first step towards incentivising domestic manufacturing, the inverted duty structure for APIs is expected to be rectified. APIs attract an excise duty rate of 12.5 per cent, whereas the final manufactured pharma product is currently taxed at a concessional duty rate of 6 per cent, keeping in mind the essential nature of the product.
Given the inverted duty structure, the credit of excise duty paid on procurement of APIs has typically resulted in accumulation of Cenvat credit, which is a significant cost to manufacturing units. Accordingly, reduction in the duty rate on APIs should follow as a logical action plan to avoid such inverted duty structures. It is worthwhile to note here that the draft GST legislation and recommendations surrounding thereto provide for refund of accumulated credit in such scenarios. However, there is no specific provision under current legislation which provides for a refund of the accumulated credit.
It is also expected that exemption from service tax on clinical trial is reconsidered, which was withdrawn two years ago. Consequent to this withdrawal, services of technical testing or analysis of newly developed drugs on human participants by an approved Clinical Research Organisation (CRO) had become taxable. The same acts as a deterrent to the activity of research and innovation, which needs to be encouraged, especially when India has the potential of becoming a global clinical trial hub. Alternately, necessary amendments can be made in the Place of Provision of Service Rules, 2012 so that the clinical trials conducted for foreign service recipients qualify as ‘export of services’ and do not attract service tax in India (viz zero-rated).
This year, the budget is also expected to address other credit related issues such as restriction of one year for the purpose of claiming Cenvat credit and provisions enabling utilisation of accumulated education cessses.
Further, the interest rate on delayed service tax payment currently ranges from 18 per cent per annum to 30 per cent per annum. Such a steep interest rate is considered as undue hardship for the industry and, accordingly, the interest rate should be restored to the previous rate of 18 per cent per annum (irrespective of the period of delay). Such measures could be seen as a necessary impetus to the government’s efforts in attaining ease of doing business.
The proposed GST regime in India is expected to simplify the current indirect tax structure. Early implementation of GST is equally important for the success of ‘Make in India’ campaign. The industry is, therefore, of expectation that the upcoming Budget session can be used as a window to propose various changes (specifically in light of the fact that issues highlighted above pertains to central taxes only) in the current indirect tax regime as a positive step towards introduction of the new tax regime.
Sanjay Garg is the partner - indirect tax at KPMG India