Clarity and finality in terms of policy will favour growth in pharma industry
The government should primarily focus on creating a more amenable tax structure that will boost the morale of all relevant stakeholders
Utkarsh Palnitkar B2B Connect | Mumbai
 "Clarity and finality in terms of policy will favour growth in pharma industry")
Despite several fluctuations in the economy, the pharmaceutical industry has demonstrated consistent double-digit growth over the last few years. The industry expects the new government to introduce a slew of reforms and a favorable tax and policy structure to facilitate the creation of an environment that fosters sectoral growth.
However, despite our strong value proposition, the sector has been subjected to a few roadblocks and stakeholders expect the new government to address the following issues on priority:
- Problem of multiple regulators and ensuring synchronisation: Policy making in the Indian life sciences sector is a distributed responsibility. While the Department of Pharmaceuticals (DoP) focuses on pharma and sits under the Ministry of Chemicals and Fertilisers, the CDRI which is primarily the implementation wing, sits under the Ministry of Health and Family Welfare. Multiplicity leads to inefficiencies and divided agendas and need to be resolved for better decision making.
- Faster approvals for clinical trials: Growth of the clinical trial industry has been stunted owing to recent developments. The suspension of trials by the Supreme Court followed by the Government is mandating that the ethics committees that clear clinical trials will not only have to be registered but also accredited, make the process more long drawn and probably detrimental to the industry. Need to take a quick decision and devise a time bound plan in this regard is imperative.
- FDI Debate: There are a few issues that surround the current status of the FDI policy in India. For instance, the FIPB has not been able to specify the criteria considered while approving brownfield investments. Second, the removal of the non-compete clause poses a threat to companies wishing to operate in niche areas. There is a need for clarity and hence finality in laying out FDI policies so that all stakeholders can make well informed decisions as far as their India strategy is concerned.
- Incentivising R&D: The spend on research and development (R&D) both in absolute terms and as a percentage of our GDP has been relatively modest. In the private sector as well, the growth in R&D spend is a fairly recent phenomenon. Add to that, the bulk of R&D expenditure has been on development rather than research. The evolution to a innovation based economy is still nascent and the fledging plant has to yet to take strong roots. It is, therefore, recommended that channelising funds both private and public toward early stage R&D is incentivised.
Expectations from the upcoming Union Budget FY2015, on the other hand vary from introduction of tax deductions, incentives for R&D to export-related fiscal support and better infrastructure.
The government should primarily focus on creating a more amenable tax structure that will boost the morale of all relevant stakeholders. The following tax related measures are recommended:
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- Service tax should not be levied on R&D/testing services performed in India where the recipient of the services is based abroad
- Excise duty on Active Pharmaceutical Ingredients (APIs) should be halved from the current 12%
- The industry also expects a decrease in CVD on the import of vaccines, specified medicaments and health supplements
- The Basic Customs Duty (BCD) on formulations stands at 10% currently (except for specified drugs, life saving drugs, vaccines and bulk drugs, which have BCD rate of 5%). Reduction of this to 5% is recommended
- The tax rate of 4-5 percent on medicines and the list of tax-exempt goods and declared goods should be uniform across all states
Further, R&D incentives can be provided by enforcing provisions for weighted deduction of R&D expenditure. These incentives should apply in case of companies incurring research expenses where a part/whole of manufacturing activity is outsourced. These incentives should also apply to the effect that entire expenditure in/for the purpose of an approved R&D facility is eligible for weighted deductions and clinical trials conducted in approved hospitals and institutions outside the R&D unit are also covered within the ambit of expenditure eligible for weighted deduction.
An abatement of 45-50 percent is also recommended to enable the pharmaceutical industry to cover its costs while calculating the central excise duty payable. This abatement should be increased as the current 35% abatement is unable to cover the trade margins and the value of R&D costs and other costs associated with the pharma industry, such as the distribution of medicines through cold chain, eg vaccines.
The contract research segment, which is another revenue churner for the industry can be incentivised by a revision in cost-plus margin of 29%, as proposed by the Safe Harbour Rules for the pharmaceutical industry.
In addition to the above mentioned, a few broad recommendations include:
- Unifying drug control, price control, biopharmaceutical and pollution control under one platform will help streamline processes and policy
- To promote the biotechnology sector, the duration of the 100% tax-free status for biotechnology and pharma SEZs can be increased from the present duration of five years to 10 years
- Encouraging human resource development and promote incubation centres by considering research efforts as one body - rather than direct resources toward parallel efforts (DST, DBT and DSIR). The National Biotech Regulatory Authority is envisaged for this. The bill has been pending for several years now
KPMG India's Utkarsh Palnitkar
- The cost plus margin of 29% as proposed by the Safe Harbour Rules for contract R&D relating to pharma industry is too high and a downward revision is expected
- The Safe Harbour Rules provisions have not defined the term ‘generic pharmaceutical drugs’. In the pharma industry parlance this term shall cover both the finished formulations as well as APIs. Clear definition is required to eliminate subjective interpretations and consequent litigation issues.
- Use of secret comparables or data not available in the public domain by transfer pricing authorities to determine conformity with the arm’s length principle should be restricted. Clarity on methodology /approach to tackle such issue is expected.
- Guidelines for harmonisation of Transfer Pricing Regulations with the other conflicting regulations such as Customs and the Drugs Prices Control Order (DPCO) is expected to reduce ambiguity
- Clarity that the provisions pertaining to Specified Domestic Transactions (SDT) would only apply to revenue expenditure and not include capital expenditure u/s 40A2(a)
- The current provisions pertaining to SDT do not provide for corresponding adjustments. Guidelines on corresponding adjustment should be issued
- Guidance for benchmarking directors’ remuneration for SDT should be provided, as by the nature itself these could be very peculiar transactions depending on several subjective factors like role, functions, qualification and experience, technical ability, extent of ownership of director, business needs of company, market scenario etc
- The current tolerance band of 3% is considered to be too restrictive and not commercially feasible. Hence, it should be restored to the earlier limit of 5%
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Utkarsh Palnitkar is the Head of Lifesciences, Pharmaceuticals at KPMG in India
*With inputs from Niloufer Memon, Pharma Analyst, KPMG in India
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First Published: Jul 02 2014 | 10:22 AM IST
