Excerpts of the recommendations by the CII's National Task Force on Biotechnology in consultation with the Department of Biotechnology, which has been working closely with Industry in identifying the deterrents and enablers for the Biotech sector

Biotechnology is an emerging economic opportunity for India. Biotechnology promises to provide far-reaching benefits to our needs in food & nutrition, human healthcare and industrial and environmental solutions. It is therefore, rightly referred to as "The Technology of Hope". Biotechnology along with Information Technology forms the two pillars of the Knowledge sector. Biotechnology has three distinct economic opportunities: (1) Research (2) Manufacturing and (3) Technology development. Whilst there are many parallels between Biotechnology and Information Technology, the research, manufacturing and technology components in Biotechnology have very different dimensions.

The following is a table that compares the two sectors:

 

ATTRIBUTE	IT	BIOTECHNOLOGY
Capital Investment	Low	High
Product Development time	Less than 1 year	3-10 years
Product Development cost	Low	High
Regulatory controls	Few	Many
Failure Risk	Low	High
Entry barriers	Low	High
IPR costs & values (R&D)	Low	High

Today India's competitive edge in Biotechnology is its cost of innovation. Whilst the human resource component is globally competitive, the hardware and infrastructure component is rendered uncompetitive on account of high import duties, power and communication costs.

Genomics & proteomics are also emerging as vital domains for Biotechnology research and product development. This calls for large investments in specific instrumentation and infrastructure including high end computing.

If Biotechnology is to be a thrust sector for India, then we need to have pro-active and pragmatic policies that incentivise and enable R&D to be conducted in a cost effective environment.


RESEARCH ENABLERS

Contract Research provides a large revenue earning opportunity to both academic and entrepreneurial organizations. The availability of a large resource of English speaking scientists places India in the forefront of R&D services in Biosciences. Current statistics reveal that 15% of the scientist population of Pharma and Biotech companies in USA are of Indian origin. Currently 500,000 graduates, 100,000 postgraduates and 1500 PhDs. qualify in the Biosciences each year. A research services model therefore has the potential of gainfully employing this valuable scientific human resource. Although presently only 15,000 bio-scientists are engaged in the Biotech sector, the contract or research services segment has the potential of harnessing 50,000 professionals per annum over the next 5 years with a revenue realization to the tune of Rs 5000 crore or $1 billion per annum.

However, in order to realize this enormous opportunity, we seek the following incentives from the Government:

1. Customs duty exemption on imported R&D equipment & consumables:

Customs Duty exemption is sought for key research enabling instrumentation and equipment required by the Biotechnology sector which include instruments such as:
· PCR machines
· DNA sequencers
· Oligonucleotide & Peptide synthesizers
· Gene Array technologies
· Specialized laboratory fermenters (<10 liters) for microbial and animal cell culture
· HPLC systems (both preparatory & analytical)
· Gel documentation systems for DNA & Proteins
· High speed and ultra centrifuges
· Protein purification work stations
· Specialized software and hardware for genomics and proteomics.


Apart from this, there are many other specific R&D tools used in Biotechnology such as:
· Assay kits
· Specialty reagents (chemical & biological)
· Miscellaneous liquid handling systems (Micro-pipettes, low, medium and high throughput robotic analysers).

All academic institutions (both private and public) engaged in Biotechnology training and research programs should be permitted to avail of this duty exemption.

All DSIR recognized private and public R&D laboratories engaged in Biotechnology should be permitted to avail of this duty exemption.

All EOUs engaged in Biotechnology R&D should be permitted to avail of this duty exemption.

All Biotechnology companies located in recognised Technology Parks and SEZ should be permitted to avail of this duty exemption.

Any specialized research equipment and/or consumables not included in the above list may also be exempt from customs duty provided that the items are approved by the Department of Biotechnology.

2. Increasing the existing limit for R&D equipment at nil duty:

The existing scheme provides for the import of R&D equipment at Nil Duty to the extent of 1% of export earnings. This is grossly inadequate given the needs of the Biotechnology sector.

· We recommend that this be raised to 25% of export earnings. This we believe is a vital incentive for export of Biotechnology products and research services.


3. Incentives for patented products:

International patenting costs are expensive but a critical need of the Biotech & Pharma industry. In order to support such international patenting, we recommend:

· Costs pertaining to international patenting including PCT/EU or USA be permitted a weighted average tax deduction to the extent of 200% of the costs incurred. This should help off set part of the patent and registration costs.


4. Incentives for clinical research/development:

Clinical research and clinical development is a vital segment in Biotechnology. Almost all Biotechnology products require to go through extensive and expensive regulatory hurdles for market entry. In order to defray these costs it is recommended that the following be considered:

· Clinical development costs as well as costs with respect to field trials that are required to be incurred in order to comply with regulatory needs for product commercialisation be given a weighted average tax deduction to the extent of 200% of the costs incurred.

5. Increase in weighted average tax deduction for R&D:

Whilst there is a current provision for a 150% weighted average tax deduction under Section 35 (2AB) for R&D costs incurred, we recommend that:

· The weighted average tax deduction for R&D costs be raised to 200% in order to encourage a greater plough back into R&D. Further we recommend that this scheme be extended for a further period of 5 years i.e. 2010.

6. Continuation of exemption under section 80ib for R&D companies:

The current scheme provides a 10-year tax holiday for a DSIR approved R&D company. The Kelkar committee has recommended the withdrawal of this scheme. This will strongly impact the profit earnings of companies that have planned their business forecasts as per the existing provision. Given the risk averse investment climate and the depressed financial markets, we recommend that the scheme be continued. R&D is a global economic opportunity for India especially in Biotechnology R&D services. It is vital that we do not withdraw this scheme.


MANUFACTURING ENABLERS:

Manufacturing is an Indian strength. However, China has developed the manufacturing opportunity to a greater advantage than India. A recent CII Report on Manufacturing has the following to report:

Manufacturing accounts for half the Chinese economy and over 40 per cent of those of prosperous Southeast Asian nations, versus 27 per cent of India's.

That manufacturing boom has boosted per capita income in China to $769, $2,717 in Thailand and $4,526 in Malaysia. Per capita income in India languishes at $450 a year.

In Biotechnology, the manufacturing forecast for animal cell culture based fermentation indicates that current capacity can only meet 25% of the 2007 demand. The Indian Biotech sector therefore has a real opportunity to take advantage of this opportunity.

There is therefore an urgent need to incentivize manufacturing. We recommend the following:

1. Duty exemption on imported capital goods for biotechnology projects:

Apart from R&D equipment, duty exemption is sought for critical capital goods required for Biotechnology Projects viz.

· Microbial & Animal Cell Culture bio-reactors (including spares)
· Hollow fibre systems for cell culture
· Chromatographic systems, columns and matrices for protein purification
· Cell separation equipment (Centrifuges, filtration equipment, membranes)
· Automation and Quality Control equipment.
· Clean room panels

It is important to highlight that the bulk of Biotechnology manufacturing is focused on vaccines and therapeutic proteins in the category of life saving drugs. Given that the import of Life Saving Drugs is permitted without payment of Custom duty, import of Capital Goods for Biotechnology projects involving the manufacture of life saving drugs may also be permitted without payment of Custom Duty.


2. Exemption of customs duty on DTA sales by 100% EOUs:

India's manufacturing sector is a dismal 27% of GDP as compared with China's 50%. In order to encourage this sector, we recommend that:

· EOUs be exempt of customs duty when effecting sales into the Domestic Tariff Area. The existing scheme permits EOUs to sell up to 50% of their total exports into the DTA. However, EOUs are expected to pay customs duty on such sales. We recommend that the Customs Duty be replaced with Excise Duty and Sales Tax.

3. Continuation of exemption under Section 10b for 100% EOU:

As per the existing scheme, 100% EOUs are exempt from corporate income tax until 2010. The Kelkar Committee has recommended that this scheme be withdrawn. In view of the fact that most companies under this scheme have planned their investments based on this incentive, it is undesirable to withdraw this scheme as it will be a great disincentive to industry especially at a time when the markets are depressed. Any fall in profits will directly impact the financial markets. It will also be a disincentive for FDI and will lead to the diversion of FDI to other countries.

4. Weighted average tax deduction for expenses pertaining to international regulatory approvals:

Although there exists a large opportunity for Indian Biotechnology companies to export to the regulated markets of USA and Europe, they are unable to do so due to the high costs involved in obtaining regulatory approvals from the International Regulatory bodies such as USFDA and others. We recommend that:

· All costs incurred for obtaining International regulatory approvals for exports to such markets be given a weighted average tax deduction to the extent of 200% of the costs incurred.

TECHNOLOGY AS A CURRENCY:

In order to encourage new technology development, it is recommended that Technology be treated as a currency. If we are to build a strong knowledge led economic environment, we need to recognize the importance of intellectual capital. It is recommended that the following be permitted:

SHARE ALLOCATION AGAINST INTELLECTUAL CAPITAL IN LIEU OF CASH:

· Foreign technologies of national relevance be permitted to be invested as equity (Intellectual capital) in any business venture in lieu of cash.

EXEMPTION FROM WITHOLDING TAX FOR IN-LICENSED TECHNOLOGIES:

· Any purchased or licensed technology be exempt from withholding tax as it is found that most Indian companies are bearing the withholding tax component as an additional cost as these are not being offset against the dual tax treaties. Moreover, most foreign companies that sell or license technologies do not have retained profits to offset against such withholding tax and the Indian company is hence expected to bear the cost of any withholding tax, thus making the technology more expensive.

TAX FREE STATUS FOR LICENSE FEES & ROYALTIES:

· Earnings through royalties and license fees realized by Indian companies through licensing technologies may be exempt of tax. This will play a vital role in incentivising Indian companies to develop proprietary products and technologies as well as in recognizing Intellectual Property as a monetary asset.

CONCESSIONS TO BIOTECHNOLOGY COMPANIES LOCATED IN TECHNOLOGY PARKS AND SEZ (SPECIAL ECONOMIC ZONES):

Given the long gestation period for Biotech companies coupled with the risk averse funding climate, it is important to support the growth of entrepreneurs in the Biotech sector through special fiscal incentives. We recommend the following:

· All Biotechnology companies located in Technology Parks, Knowledge Parks and SEZs will be eligible to a 10 year Tax Holiday.
· All Biotechnology companies located in Technology Parks, Knowledge Parks and SEZs will be permitted to import instrumentation, equipment and consumables free of Customs Duty.
· All Biotechnology companies located in Technology Parks, Knowledge Parks and SEZs will be exempt of Central Excise Duty for a period of 10 years.

For CII's National Task Force on Biotechnology

Kiran Mazumdar-Shaw,
Chairperson
Confederation of Indian Industry National Task Force on Biotechnology,
and Chairman and managing director, Biocon India Group