Pharma sector did not receive its due attention in the budget

The issues around the pharmaceutical sector are more policy related, with tax measures forming only part of the solution. Expectations from the budget, therefore, largely revolved around laying to a rest the multiple questions related to regulations and policies in the sector (FDI policy, clinical trial issues, margin pressures arising due to the pricing policy). The industry also hoped that the budget would aim to incentivise R&D in the country, to fuel innovation and growth. Stakeholders were also looking forward to a resolution for the active pharmaceutical ingredients (APIs) industry that is presently facing immense competition for China, creating a situation where the domestic formulation sector is heavily dependent on China for APIs.
 
While the support of the Government toward macro issues like skill development via the National Skilling Programme and bridging the infrastructure gap are fairly commendable, issues directly related to the pharmaceutical industry were not addressed in the budget announcements.
 
The promise of central assistance to strengthen drug laboratories and research should assist research in the country. However, the clarity around the role of the CDSCO and CDRI and the current regulatory ambiguities prevail.
 
Initiatives around developing clusters for biotech in Pune and Kolkata while strengthening the existing clusters will provide traction to the biotech sector in India. Promoting global partnerships to strengthen generic engineering and biotech is also a commendable measure in the same direction.
 
The Free Drug Service and Free Diagnosis Service which were mentioned as priority were not substantiated enough from a procurement perspective, leaving behind ambiguity around execution. The industry is plagued with supply chain challenges and addressing procurement is vital.
 
While entrepreneurship has been incentivised in the budget, it is important to make specific provisions for pharma related research and development, and entrepreneurship. Risks involved with any venture in this domain are relatively higher and it is imperative to dilute the stigma associated with failure to create an innovation friendly environment.
 
Extending the benefit of additional deduction of 15% to medium size investments, to encourage manufacturing entities in investing into new plant & machinery will also help the manufacturing segment in the sector. This might especially benefit API manufacturers and contract manufacturing organisations (CMOs).
 
The industry will also benefit from the introduction of range concept and multiple year data from a transfer pricing perspective. The long awaited expectation of the tax fraternity in line with the international best practices has finally been accepted. The introduction of range concept instead of arithmetic mean for benchmarking purpose would lead to a more rational determination of the arm’s length price, whereby the result would not be skewed by a few comparables. Similarly, the use of multiple year data for benchmarking would assist in capturing the impact of business cycles during the benchmarking process. However, detailed rules in this regard are still awaited.
 
Provisions introduced for rollback of APA up to previous four years aim to reduce litigation on transfer pricing matters and may be taken positively from a transfer pricing perspective.
 
However, withdrawing exemptions from ‘technical testing of newly developed drugs on human participants’, could further hinder growth of the clinical trials industry which is already under immense pressure. Regulations have heavily impacted the growth of this segment, and further taxation would only add to the trouble.
 
In a nutshell, we believe that the pharmaceutical sector did not receive its due attention this year. There was much left to be desired in terms of clarifying and answering the many questions that all the pharma industry stakeholders have in mind.
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Utkarsh Palnitkar is the Head of Lifesciences; Pharmaceuticals, KPMG in India
 
With inputs from Niloufer Memon, Pharma Analyst, KPMG in India