The global pharmaceutical industry has grown at 9% in 2007 and the focus of the pharmaceutical market continues to shift towards emerging countries where the growth rate is higher. As per industry reports, the size of Indian industry is increasing at more than 10% a year.
Robust economic growth, availability of a skilled scientific workforce at low cost, a fairly stringent regulatory environment and largest number of US FDA approved plants outside the USA, makes India an attractive destination in the eyes of multinational conglomerates. Contract research and contract manufacturing is one area offering plenty of opportunities to India.
Time and again, the government has stressed the need and willingness to position India as pharma and biotech hub. Advent of new patent regime, national biotech policy and proactive state government policies are some steps taken by the government in this regard.
Appreciating rupee has been the cause of concern for the pharma industry in the recent times, resulting in declining exports revenues for domestic companies. Industry studies reveals that growth of fake and spurious drugs at alarming rate of 20-25% has also severely impacted the businesses. Further, the per capita healthcare expenditure of India is approximately one third of China and well below the world average.
To add, the Government is debating on adoption of price control and price negotiation mechanisms and proposes to increase the coverage of drugs under the Drugs (Price Control) Order, 1995. With near approaching elections, the Government may want to end the term with populist changes in health science policies in the form of price controls. However, at the same time it is also necessary to consider the impact of such actions on the industry.
Budget 2008 is around the corner and the industry has drawn the wish list of key demands which have remained as unfinished agenda of previous budget prints, though this time around the industry is keen on getting the sops for R&D and exports.
The R&D phase including drug development requires long gestation period of more than 12 years. Given the global low rate of success in Pharma R&D, the Indian industry does need a strong support on tax incentives. Accordingly, Industry bodies have sought the restoration of tax holiday under section 80IB(8A) for 10 years, for standalone R&D companies. Industry experts believe that the revival of the tax holiday has become more important in view of recent wave of de-merger or hiving off activities in the industry.
In addition, the industry feels that given the peculiarity of industry, there is need to provide necessary support to raise the R&D activities in India. In this regard, industry bodies have sought the rise in weighted tax deduction for R&D spends to at least 200% from 150%. Currently, the provisions allowing weighted deduction are restrictive in nature so as to cover only expenditure incidental to R&D carried on at the in-house R&D facility. Accordingly, industry bodies have sought the inclusion of expenditure incidental to research carried outside R&D facility including clinical trials, bio-equivalence studies etc carried on in India or in any foreign country, within the ambit of weighted deduction.
Development of product patent regime has created vital opportunity for the industry and it is need of the hour for the industry to ride on the opportunity to create competitive edge in research and development arena. In order to attract the companies to tap the opportunity, the industry has sought tax holiday for profits arising from new research products, where R&D has been done in India.
Industry bodies feel that the health sciences sector is capable of creating an economic boom similar to the IT sector. Accordingly, the extension of tax holiday benefits similar to section 10A, 10B to export oriented units for export of biotech and healthcare segments are being sought by the industry.
Industry studies reveal that there is lack of adequate healthcare infrastructure in the country. As per the study, bed per thousand population ratio for India stands at 1.1 compared to average ratio of 4.3 for counties like China, Korea, and Thailand. In spite of the phenomenal growth in the healthcare infrastructure, the ratio for India is likely to reach at 1.85 and in best case scenario at 2 by 2012, which would require total estimated investment of US$ 77.9 bn. With the view to attract such investments, industry bodies have sought the 'infrastructure' status for the healthcare industry and there by seeking tax holiday benefit under section 80 IA and extension of deduction under section 80 IB(11B).
In the recent past, the industry has witnessed lots of action by Indian pharma companies on acquisition front. Given the India advantage, MNCs have also been seen spreading their operation in India. This has resulted in need for special attention towards transfer pricing regulations in the country. The industry bodies feel that introduction of Advance Pricing Agreement mechanisms and benchmark of commercial transaction would provide greater clarity about the tax implication to the companies before entering into international transaction.
On indirect taxes, the industry has sought a cut in excise duty on drugs from current rate of 16% to the merit rate of 8% (and zero per cent on life saving drugs). Another demand has been to increase the abatement limit for computation of excise duty from 42.5% to 55%.
The industry bodies have also sought the custom duty and VAT exemption on import of all life saving drugs/equipments, reduction in the basic customs duty to 5% on formulations as well as scientific research equipment. Further, industry bodies feel that currently India does have enough infrastructures to produce equipments for biotechnology and medical research in the country and accordingly, additional custom duty on such equipment should be withdrawn till such equipments are manufactured in India.
The industry is hoping to get the booster shot from the FM in the forthcoming budget. The industry believes that if the required support and stimulus is provided, it holds the promise of repeating the success story of IT Industry in India.
(The authors are senior tax professionals with Ernst & Young)