It is for the second consecutive time, the country's pharmaceuticals sector has been left unattended by the Union Government as none of their expectations got a mention in the Union Budget 2005-'06.
The Union Budget 2005-'06, presented by the Finance Minister P Chidambaram today has by and large sidelined the industry with no concrete plans for this potential industry sector announced.
Though the government had given a general assurance that a stable policy environment and necessary incentives to help the two industries become world leaders would be provided, there were no mention about the vital issues like the excise duty reduction on drugs, which was a demand that has been voiced by the industry for long time now.
Even though the Budget has lightly touched on the industry by an increase in the Pharmaceutical Development Fund corpus was assured, the size of the increase is not clear. The only relief is the proposed reduction of the customs duty on 9 specified machinery used in these two sectors to 5 per cent.
However, the pharma and biotech R &D will continue to enjoy weighted deduction of 150 per cent on expenditure on in-house research activities for two more years (till March 31, 2007). The R&D institutions approved by Department of Scientific and Industrial Research will continue to enjoy 100 per cent deduction of profits.
The SSI sector among the pharmaceutical manufacturers has received a slight relief in the form of increased turnover exemption limit. The finance minister has proposed to raise the ceiling for SSI exemption based on turnover from the level of Rs 3 crore per year to Rs 4 crore per year. The SSI units will now have only two options: either full exemption on the first clearance of Rs 1 crore or normal duty on the first clearance of Rs 1 crore with CENVAT credit.
The SME Growth Fund, which has been increased marginally from Rs 135 crore to Rs 173 crore, will also prove helpful to the SSI sector in their attempt to upgrade their facilities. The government has also proposed a comprehensive bill "Small and Medium Enterprises Development Bill" to take care of SSI sector.
Reacting to Union Budget 2005, Ajit Dangi, director general, OPPI, said that the peak import duty is reduced to 15 per cent. The government could have further reduced the duty, at least in the area of life saving drugs. The peak customs duty could have been ratified as per the recommendations of Chelliah committee i.e. 20-10 per cent for bulk drugs and 15 per cent for formulations. The IT concessions offered to pharma and biotech are not on par with information technology sector.
While, Suresh Kare, president, IDMA, commented, "There is no talk of the excise duty reduction to 8 per cent from the existing 16 per cent. This would have stopped the migration of the SSIs to places like Baddi. Besides, this also would help bring down prices of drugs." He added that the benefit period for 150 per cent weighted deduction for the in house R&D could have been extended upto 2010 instead of 2007, as announced in the Budget.
Nevertheless, Habil Khorakiwala, president of Indian Pharmaceutical Alliance (IPA) and chairman Wockhardt Limited, gave his comments that though there are positive measures, which Finance Minister P. Chidambaram had announced for agriculture, infrastructure, healthcare and education, it has not been extended to the pharmaceutical industry, which is at an inflection point as India has joined the global patent regime. There is no bold initiative to promote pharmaceutical R&D in this Budget except for the welcome continuance of existing benefits. The government should have exempted discovery-related income from taxes, at least to the extent these are ploughed back into research.
"While IPA welcomes the increase in the healthcare outlay from Rs 8,420 crore to Rs 10,280 crore to train healthcare workers, provide more medicines and strengthen the primary community healthcare system, I wish the government could have done more to increase the access of rural people to modern medicines and healthcare. I find it odd that a government that can give excise relief to imitation jewellery and mosaic tiles could not cut duties on medicines and hospital equipment to make healthcare more affordable," he added.
Reacting to the Budget, I A Mody, chairman, Cadila Pharmaceuticals, said, on the one side Govt wants R&D to progress, but there is no clue in the Budget for the survival of knowledge based industry like pharmaceuticals and biotechnology. The finance minister has not given any justice to develop this side of the potentiality of the Indian industry, he said.
He pointed out, "After 1 January 2005, the new patent regime has come into force and all the patented products are going to be prohibitively expensive. To fall in line with the many countries in the world, it is high time that the Govt should come out with National Health Insurance for the nation. Otherwise leave aside the poor man, even higher middle class man may not be able to afford the new inventions required for health."
Ranjit Shahani, president OPPI said, "The Industry was hoping that the finance minister would rationalize taxes on medicines, which are currently 37 per cent (Excise duty, sales tax, octroi, turnover tax etc.). To make medicines affordable, it is essential to rationalize these prices and one way to do this would have been to reduce the Excise Duty from 16 per cent to 8 per cent."
There are no significant R&D incentives. Import duties on life saving drugs should be brought down to zero, abatement at 40 per cent is inadequate, Excise Duty on physicians' samples should have been devoid of excise, he added.
However, DB Mody, chairman, Pharmexcil said, "We welcome the increase in corpus for R&D, research, clinical trials, and biotechnology. Reduction of customs duty to key pharma machineries will help the industry. The re-emphasis and enhanced allocation for rural health development is a welcome measure."
T S Jaishankar, chairman, Confederation of Indian Pharmaceutical Industries (CIPI-ssi), said in Chennai that the Union Budget 2005-'06 ignored to address the severe crisis faced by the small-scale pharmaceutical manufacturers in the country due to the MRP linked excise, and the crisis would lead to closure of 5000 SSI units in the country.
"The finance minister was clever to introduce MRP linked excise by the 8th January notification, so as not to link the issue with his populist Budget aimed to satisfy common man and foreign investors. The Budget showed no concern about the industry, except for announcing an increasing in turnover limit from Rs 3 crore to Rs 4 crore for SSIs. Again, this is going to benefit only large units, and not small units as MRP linked excise will cause exhaustion of the limit quickly. Announcements like Rs 150 crore R&D fund and equity support for pharma SMEs, is also not going to benefit small scale manufacturers, and the minister has made it clear he does not want SSIs to remain in the business map of the country," Jayashankar added.
Giving his comments on the Budget 2005, B Sethuraman, president, Tamil Nadu Pharmaceutical Manufacturers Association and secretary, Federation of South Indian Pharmaceutical Manufacturers Association (FOSIPMA), said, "The Budget is totally disappointing and ignored to consider the demands of the industry. The Budget totally ignored to consider the crucial pharma industry, though gave liberal incentives to many other segments like sugar, tea, textile, food processing etc."
He added that the industry was expecting some crucial announcements like reduction in excise duty to 8 per cent and increasing turnover limit from Rs 1 crore to Rs 3 crore to help the SSIs survive. Nothing came in the Budget, and we would fight against this injustice, he bemoans.
Venkat Jasti, vice-chairman of Pharmexcil and founder of Suven Life Sciences stated that the extension of weighted deduction on R&D by two years from 2005 to 2007 is not sufficient as innovation research is a long- term activity and the extension should have been made to at least for five years. The increase in R & D corpus fund from the present Rs 150 crore- mark looks vague as no specific amount has been assured. The Pharma and Biotech industries require at least Rs 2000-3000 crore as R & D fund. The Rs 150 crore fund is not even suitable to meet a single company's requirement. Textiles have been given technology upgradation support whereas pharma industry, which needed such support, has not been considered. SMEs have not been much benefited by the Budget. Technology upgradation fund would have been useful to SSIs in complying with Schedule M norms. There should have been a provision for infrastructure development for the pharma industry. Patent offices need to be strengthened, he added.
Satish Reddy, managing director and COO, Dr Reddy's Laboratories reacted to the Budget 2005 saying that with the overall policy framework already being put in place one cannot expect significant or industry-defining policy announcements through the Budget.
As this Budget makes it clear, only incremental changes can be expected. Budget watching is therefore more or less a redundant activity. Having said that, I must add that this is a positive sign and is indicative of the maturing of the Indian economy and its policy framework.
There are a quite few positives in this years Budget. The reduction of the customs duty and income tax, although expected, is a welcome move. The seriousness of the government in the implementation of VAT and simplification of tax issues are big positives. The policy initiatives announced for the infrastructure and the agricultural sectors will have a positive spiralling effect on the economy as a whole, he opined.
From the pharmaceutical industry point of view, it is an average Budget. There are no definite proposals for the pharmaceutical industry. There has been a mention of creating a policy framework to encourage R&D. But we will have to wait and see if this intent really translates into definite action, he concluded.
Nitin Deshmukh, director, ABLE, called the Budget 2005 as a very positive one since much of its pre-Budget recommendations for the biotechnology sector to the finance ministry, ministry of science and technology and the department of biotechnology early last month have been accepted by the Union Government for funding support for research and entrepreneurship in the sector, he stated.
He said that the government has increased allocation to the existing Rs 150 crore. "The efforts of continuing with the weighted average tax deduction for Research and Development expenses at 150 per cent and announcement of a Rs 500 crore Fund by SIDBI for investment in SME's which would also cover the biotech sector are laudable. The sector can also be expected to benefit from the announcement of grant of Rs 100 crore to the Indian Institution of Science," he added.
S V Veeraamani, vice president, IDMA (Tamil Nadu) said that the Budget was total disappointment to the industry, which was expecting measures like reduction in excise duty to 8 per cent and increase in nil excise duty limits to Rs 3 crore from the existing Rs 1 crore for SSI units.
However, the announcement in the Budget to reduce peak excise duty on imported raw materials from 25 per cent to 15 per cent would benefit the pharma industry by about 3 per cent decrease in imported raw material costs, said Veeramani.
He pointed out that had the government reduced excise duty to 8 per cent, the excise duty burden on the industry could have been reduced from 260 per cent increase due to the MRP based excise to 130 per cent, thus balancing by some extent the damage done due to introduction of MRP based excise regime.
"The positive factors in the Budget include capital subsidy allocation to SSIs upto Rs 173 crore, which should help in the Schedule M modernization process. The industry is also looking forward to the proposed specific plans for SME/IT sector and manufacturing industries. The announcement to reduce customs duty on nine specific pharma machinery and biotech industries to 5 per cent is also welcome," Veeramani said.
K Raghavendra Rao, managing director, Orchid Chemicals & Pharmaceuticals, said that there is nothing specific for the pharmaceutical industry but the Finance Minister's assurance that the government's recognition of it as a sunrise sector and the promise to provide a stable policy environment for the industry are extremely encouraging. The reduction in import duty on capital goods is a welcome move. Streamlining of personal as well as corporate income tax is also a positive step.
Sudhir Valia, director, Sun Pharma, reacted to the Budget saying that overall impact of the Budget is positive. There are strong signals in the form of R&D corpus increase and intent to make pharma a world-class sector, from the government.
Specific positives include cut in customs duty, two-year extension of 150 per cent weighted deduction for R&D and deduction of profits for a new industrial unit in Jammu. "The cut in depreciation on plant and machinery from 25 to 15 per cent is negative, however impact may not be significant as pharma as such is not very capital intensive," he added.
According to Ajay Piramal, chaiman, Nicholas Piramal India, for the Pharmaceuticals sector, extension of 150 per cent weighted deduction on R&D expenditure till 2007 is welcome, although we believe this should have been longer-term, given the nature of investment in research work. Overseas clinical trials and global patent filing expenses should also qualify for weighted deduction. "The Budget has belied industry's hope of lower excise duty. But I am pleased with the government's commitment to implementation of VAT, and am sure that it will take suitable measures to remove transitional difficulties being faced by trade," he opined.
Reduction of individual and corporate taxes will fuel economic growth and investment. The proposal to make book profits tax a deferred tax is also in the right direction.
"Customs duty reduction in various sectors - including Pharmaceuticals where it has been reduced to 5 per cent for certain machinery, should enhance competitiveness of user Indian companies. Similarly, foreign trade liberalization initiatives should add a fillip to India Inc.'s growth in global markets," he said.
Dr P A Mody, CMD, Unichem, said, "The extension of 150 per cent weighted deduction benefit for the in house R&D upto 2007 is positive, reduction of peak custom duty to 15 per cent from 20 per cent is a step in right direction, the setting up of an advisory committee to decide on abatement from MRP to calculate excise duty is encouraging."
He pointed out that the reduction in corporate taxes for domestic companies to 30 per cent would result in benefit to domestic corporate. However the imposition of surcharge and the reduction in depreciation rates to 15 per cent from 25 per cent will offset these benefits. The hike in the excise limit for small-scale sectors to Rs 4 crore from Rs 3 crore will also be beneficial for SSI units.
Dr. D.B. Gupta, chairman, Lupin, stated that while the FM's proposals on treatment of depreciation are seemingly tax neutral reducing the depreciation rate to 15 per cent from 25 per cent for the first year would mean that companies in the growth phase, which are investing in augmenting their capacities may have to pay higher tax in the first year.
"For the Pharma sector, the most heartening news is continuance of the R&D allowance for two more years. At a time when the Indian pharma sector is investing heavily in R&D, this incentive is precisely the kind of boost that is needed," he said.
Kewal Handa, executive director, Finance, Pfizer, said that the government has generous plans for the healthcare sector. However it is not so generous to the pharmaceutical industry. The excise duty could have been brought to 8 per cent. The weighted deduction on the R&D could have been extended by another five years instead of two.
Jatish N Seth, secretary, Karnataka Drugs and Pharmaceuticals Manufacturers Association (KDPMA) and director Srushti Pharmaceuticals, stated that industry would have been most happy if the Finance Minister had fulfilled the issues of MRP based Excise duty.
He said that what came is as the biggest disappointment is despite the government had asked Confederation of Indian Pharma Association (CIPA) to call off the agitation and wait for the Budget, there were no mention about the same in the Budget.
Suresh Khanna, president API (Bulk) Micro Labs and past president, KDPMA stated that there was nothing specific for the pharma sector except the hike in Budget for the healthcare to Rs 10,280 crore which would increase drugs consumption resulting in augmenting of sales for the pharma companies. What makes the Budget hopeful are the pharma policy, abatement committee formation and fall in corporate tax by 5 per cent.
Sunil Mundra, managing director, Natural Capsules was visibly upset over the Budget, which he termed as 'hopeless for the pharma sector'. The industry is already reeling under crisis with the MRP based excise duty. Contract manufacture has been hit and so are domestic sales. It looks that that the 12,000 small scale industries in the country will be hit.
Representing the clinical research organisation, Lotus Labs, managing director, Sudhir Pai, described the Budget as a positive one. The statements on the encouragement to clinical research will give a fillip to the research activities in the country. It is heart warming to note that customs duty reduction, extension of ten-year tax holiday to 2007 from 2005 end will help companies a great deal, he added.
Kiran Mazumndar Shaw, managing director, Biocon Limited and chairperson Vision Group on biotechnology, government of Karnataka, was euphoric about the Budget. The finance minister was emphatic about the stable policy on biotech policy. He has addressed a large number of issues based on the recommendations of ABLE. The mention about Rs 100 crore- support to the Indian Institute of Science to recognise it as a 'Knowledge Centre' is the biggest fillip to the scientific community including the Rs. 150 crore corpus proves the support for R&D. On the whole the Budget has focused on four areas viz., Infrastructure, health, education and scientific research, she stated.
Dr. Shama Bhat, managing director, Bhat Biotech, stated that expect for two announcements, biotech policy and the slash in 5 per cent excise duty for 9 specified equipment for the biotech and pharma sector, there was nothing attractive in the Budget.
Dr. K K Narayanan, managing director, Metahelix, and member, executive council, ABLE said that the Budget is a positive one with reference to the biotech sector. With a lot of recommendations of ABLE already being met, biotechnology in the country today represents a growing recognition and its importance to economic growth and development of the people. The Rs 50 crore National Fund for Strategic Agricultural Research is the biggest support to the sector, he added.
Koteswara Rao, president of Organisation of Pharmaceutical Manufacturers, said, "The SSI units were expecting the excise duty to be reduced from existing 16 per cent to 8 per cent gradually over the coming years. It is depressing to note that the government hasn't made any change in this regard. Currently, no excise is being levied in three states and the remaining states in the country are suffering. There is no uniformity in the policies."
He added that over 60 per cent of drugs produced in the country are from SSIs and the segment is often neglected. MNCs are going to be benefited from such a situation.
M Adinarayana, company secretary, Natco Pharma, commented that by offering the extension of weighted deduction on R & D, the Centre has recognised that innovation and R & D are key to the pharma industry. The special purpose vehicle proposed to initiate infrastructural development will also benefit pharma industry.
The R & D corpus of Rs 150 crore or plus is not sufficient at all, as the industry requires not less than Rs 5000 crore. The current funds don't meet the needs of the industry spread in 27 States of the country. The industry has expected more support in terms of exports and clear policy statements concerning intellectual property rights.
Dr BS Bajaj, chairman, All India Biotech Association-Southern Chapter, said that reduction of customs duty on imported raw material is a welcome move. This will enable companies to reduce the cost of production. The companies can stay competitive in the international markets.
The R & D corpus fund needs to be increased, the present Rs 150 crore fund is a drop in the ocean. The industry would need a minimum of Rs 1,000 crore in order to meet its research needs, he pointed out.