RUN-UP TO THE BUDGET. Strengthen research sops, up healthcare spend

Will Finance Minister Arun Jaitley leave a lasting legacy behind on the health of the nation, asks Ranjit Shahani, Vice-Chairman and Managing Director, Novartis India.

His query resonates with several industry representatives, as the last few Union Budgets offered very little, if anything, to the pharmaceutical industry, despite it being oft-described as a “sunrise” sector. This time, though, there is hope of support for export, manufacturing and research, woven into the Government’s “Make in India” theme. Besides, there is also the long-standing promise of increasing Government spending on healthcare.

Increasing healthcare investments from the dismal 0.6 per cent to 3 per cent of GDP will make all the difference, says Shahani, former President of the Organisation of Pharmaceutical Producers of India, a platform largely for multinational companies.

“We have saved $50 billion from (the) oil price drop, foreign exchange reserves are at a record high, (the) economy is growing, inflation (is) in control and goodwill (is) tremendous. If the Finance Minister makes token amounts of allocation to schemes as in all the past budgets, there is no redemption for healthcare,” he adds. Hitesh Sharma, Partner and National Leader (Life Sciences) with EY (formerly Ernst & Young) India, expects the Budget to support the Government’s “Make in India” theme on exports, manufacturing and innovation-oriented research.

An existing problem facing the pharma industry is the inverted tax structure where excise duty on the input material is higher than that on the final product.   As a result, manufacturing companies are left with credit that they cannot use, and cash gets blocked, says Sharma, touching on a key point highlighted by the Indian Drug Manufacturers’ Association (IDMA) as well.

To resolve this mismatch, IDMA suggests that central value-added tax (Cenvat) credits accumulated by manufacturers be refunded to them at the end of every financial year. “Alternatively, the unutilised Cenvat credit may be allowed to be utilised for paying statutory taxes such as service tax to the Government so that the burden on the pharmaceutical industry can be reduced,” it points out.

By defreezing Cenvat credits accumulated in the manufacturers’ accounts, it can be put to more constructive use, explains IDMA’s Daara Patel. IDMA represents domestic small and medium drug companies.

Manufacturers need a supply of funds to set up new units, upgrade machinery, equipment, etc. And the accumulation of Cenvat credit due to the mismatch in input and output costs obstructs this supply, says Patel. (Cenvat credit allows producers of the final product a set off against taxes paid on input materials.)

Much streamlining is also required for drug companies involved in innovative research, say industry representatives.

Last year’s Budget removed an exemption that clinical trials had on service tax. And tax sops were given only to those with in-house research or who outsourced to Government institutions.

The Government needs to take a view of research incentives, by reinstating  the exemption on service tax on clinical trials and extending tax benefits to research leased out to any recognised clinical research centre, says EY’s Sharma. Incentives also need to be provided to companies for the cost they incur in filing patents, supporting these filings in India and overseas, and litigating to protect them, besides the actual land and building cost incurred to set up technically sound research facilities, say industry representatives.

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