R&D spin-offs likely to pinch pharma cos

Leading drug makers, who are the beneficiaries of a key fiscal incentive that allows 150 per cent weighted tax deduction covering all research and development (R&D) expenses incurred in-house, may not be able to make full use of this sop once they spin-off their research operations into separate entities.

The scheme is not offered to stand-alone research entities, say industry analysts according to Section 35(2AB) of the Income Tax Act 1961.

Pharma companies like Ranbaxy, Sun Pharma and Nicholas Piramal, that spend 5-10 per cent of their sales on R&D, have announced plans to shift their research programmes into separate companies.

The new research entities of such companies will also not be eligible for another research incentive, that is, the 100 per cent income tax exemption on profits for research entities as the government has not extended this benefit to companies set up after March 31, 2007.

Pharma companies declined to comment on tax incentive eligibility of their new entities as they are yet to hive off their units.

"We believe that the new R&D companies can separately apply for weighted tax deduction. However, on income tax exemption on profits, a favourable decision from the government is required," senior industry officials said.

"The spin-off doesn't mean that the entire research programmes will move out of the existing company. It's only the new drug research that will be part of the new entity. All existing generic drug approval related R&D will continue in the parent company, and enjoy the tax exemptions," officials added.

Whether the new entities be considered as in-house research facilities or not is the issue that is bothering the industry. Technically, only those companies engaged in the business of manufacture and production of any drugs and pharmaceuticals will be able to enjoy this privilege.

Glenmark, which decided to divest its generic manufacturing business and kept its R&D with the parent company, may be the only one to escape this quandary.

Industry associations as well as companies are approaching the finance ministry to ensure that their plea to extend Section 80 1B (8A) of the Income Tax Act 1961, which exempts 100 per cent of the profits of scientific research companies, till 2012 are heard, sources informed.