By Ranjit Shahani
As 16 March draws close, Indian healthcare is once again at the crossroads waiting with bated breath for the Union Budget in the hope that it will provide the necessary impetus to the pharmaceutical industry. Announcing Infrastructure status for Healthcare would be just what the doctor ordered.
The reality is that rural and semi-urban India lacks even the most basic healthcare infrastructure. Since setting up facilities in such areas involves substantial investments with long gestation periods, tax incentives are imperative. A weighted deduction for expenditure incurred in rural/semi-urban areas is therefore required.
Other areas needing incentives include:
Research & Development: Presently, only weighted deduction for in-house R&D is allowed, without specific tax benefits for units engaged in R&D or contract manufacturing. Since both activities are pivotal growth drivers, tax breaks are indispensable to accelerate growth and make India an attractive R&D and contract manufacturing hub. Benefits for such units can be provided via deduction from profits linked to investments, which includes permitting research tax credits to offset future tax liability.
With weighted deduction only available for expenditure on in-house R&D facilities, it ignores the fact that Indian companies incur immense expenses on NCE (new chemical entity) and other filings with the US FDA. Since pharma discovery research entails a lengthy, risky and expensive process, provision should specifically be made for weighted deduction vis-?-vis expenses incurred outside the R&D facility.
Moreover, clinical trials done in approved hospitals and institutions by non-manufacturing firms should be covered within the ambit of expenditure eligible for weighted deduction.
And apart from companies into manufacturing activities, weighted deduction should be available to companies where R&D expenses are incurred for manufacturing work partly or wholly outsourced.
Deductions for Urban-area Hospitals: Presently, 100 per cent deduction is allowed for companies deriving profits from operating and maintaining hospitals anywhere in India, except in certain urban zones. This deduction is available to hospitals for five consecutive years from the previous year in which the hospital begins operations. The deduction should be extended to hospitals in urban areas also, with the tax holiday being extended to 10 years. Or hospitals should be allowed to select five consecutive years from the initial 10 years of commencement.
Business Cycle Losses: Company losses incurred in the year of product/molecule launches are disregarded and such expenses disallowed. Such business cycles vary among companies. As per global norms, specific standards should be spelt out to consider such cyclical expenditures.
Customs Duty on Supplements: Basic customs duty is 10 per cent and additional customs duty is 5 per cent on drugs, whereas nutraceuticals and health supplements are levied 30 per cent and 10 per cent respectively. For manufacturing, central excise cuty is 5 per cent on drugs and 10 per cent on supplements. Since supplements play a key role in improving overall health, their levies should be on par with drugs.
Duties on Life-saving Drugs and Diagnostics: Making critical life-saving drugs available to patients at reduced rates lowers treatment costs for many ailments. Early disease diagnosis also reduces therapy costs and saves lives. All life-saving drugs and medical devices should therefore be exempt from custom duty. Where different devices have partial/full exemption via various norms, these may be rationalized for clarity and fewer disputes.
Variable Abatement: While only 35 per cent abatement is allowed on pharmaceuticals, other products have higher abatement: pan masala 55 per cent; glazed tiles 45 per cent; mineral water 45 per cent; and clocks 40 per cent. With the present rate not even covering trade margins and additional costs such as distribution, pharma abatement should be raised to 50 per cent.
Negative List: As per the Finance Ministry's concept note, it's proposed that services in the Negative List will be tax-exempt. A clinical establishment's health services will only be exempt if the turnover is below Rs 4 crore in the previous year. This will prevent many hospitals from providing quality healthcare at lower costs, ultimately affecting the common man. All health services should be unconditionally exempt from service tax.
Besides these, there are other important steps too. Exports should be incentivized via fiscal measures to maintain the pharma sector's competitive edge globally. Although corporate tax has been reduced to 32.44 per cent from 33.22 per cent, this was offset by the increase in MAT (minimum alternate tax) to 18.5 per cent from 18 per cent. MAT should therefore be reduced.
Finally - Biotechnology, which was totally sidelined in Union Budget 2011-12. Biotechnology can play a vital role in reducing death and disease rates, particularly in the case of mutating virus strains such as TB, HIV/AIDS and H1N1. The biotech sector should be encouraged by facilitating venture funds; incentivizing R&D via a five-year tax holiday on products developed in-house; zero duty on R&D equipment; and longer tax-free allowance for biotech SEZs.
Given manufacturing and services' decelerating growth rates in recent quarters, a booster shot for healthcare and pharmaceuticals may be exactly what the doctor prescribed to energize India's flagging economy.
The writer is President, Organisation of Pharmaceutical Producers of India and Vice-Chairman, MD, Novartis India