This year’s Finance Bill has inserted an explanation to Section 37 of the Income Tax Act (which disallows business expenditure prohibited by both Indian and overseas laws) pertaining to the expenses incurred by pharma companies on medical practitioners. The explanatory memorandum to the Finance Bill cites a 2012 CBDT circular which says that under the Medical Council of India rules (now National Medical Commission), “medical practitioners and their professional associations” are prohibited from “taking any gift, travel facility, hospitality, cash or monetary grant from the pharma and associated health industries”. However, there is considerable legal ambiguity over expenses that are kosher and those that fall foul of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and by extension Section 37. Given this ambiguity, it is doubtful if the Finance Bill amendment will be able to achieve its objectives of correcting unethical industry practices and also mop up revenue alongside. Concealment of expenditure becomes easier when the lines are not clearly drawn. Clause 6.8 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 allows medical practitioners to participate in research that has regulatory sanction. As a result, promotional expenses are often shown as meant for ‘research’. That said, the industry cannot be faulted for product information campaigns, which include explaining the underlying science of a product. To take another example of an anomaly, the explanatory memorandum clubs “medical practitioners and professional associations”, whereas a 2009 amendment to Clause 6.8 of the 2002 Regulations appears to exempt associations from its ambit. Meanwhile, several rulings at the level of the Income Tax Appellate Tribunals, and a few at the High Court level, have compounded the ambiguity over permissible pharma expenditure.

The rules should be sharpened to distinguish between what is de facto bribery and bonafide expenses meant for educating the client; or else, legitimate expenses can give rise to tax harassment. With the new amendment, pharma companies will have to maintain far more detailed records to establish that their expenses are above board. This is fine, as long as tax officials are deprived of chances to misuse their powers.

The industry must subject itself to a mandatory code of conduct, as against a voluntary one in force, the Uniform Code for Pharmaceuticals Marketing Practices, 2014, drawn up by the Ministry of Chemicals and Fertilisers. It is just as well that a revised version of this code is on its way. For effective regulation, an independent body akin to the NMC can be considered. This could set at rest much of the prevailing confusion over how the relevant laws and their rules should be implemented.

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