Drug sector needs a friendly tax regime

Drug sector needs a friendly tax regime
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First Published: Mon, Feb 26 2007. 12 09 AM IST
Updated: Mon, Feb 26 2007. 12 09 AM IST
The Rs33,000 crore pharmaceutical industry’s demand for excise cuts and sops for research were largely ignored in last year’s Union Budget. Drug makers are reiterating most of the same demands this year and its lobbyists hope the finance minister will be more benign in the forthcoming Budget. With the tax benefits on R-D expenses expiring in March this year, there is an edge of urgency in their tone.
Malvinder Mohan Singh, managing director and chief executive officer of Ranbaxy Laboratories, India’s largest pharmaceutical company, in an email interview with Mint’s Bhuma Shrivastava, presents his wish list for the sector and underscores the importance of incentives to ensure drugs research is carried out in India. Excerpts:
Indian pharmaceutical companies have of late multiplied their research spend manifold. What are the challenges it faces and what would you like the government to do assist the sector?
Pharmaceutical research and development is fraught with risks and there is no guarantee of success. Only one in 10,000 substances screened eventually makes it to commercialization and it takes nearly 10-15 years for the entire process. 
Indian companies can bring a new molecule to the market at a fifth of the cost—$200 million or Rs880 crore—incurred in the developed world. Investment in drug discovery for treating infectious diseases such as tuberculosis, malaria, and measles, endemic to our part of the developing world, remains woefully inadequate.
However, Indian pharma companies cannot fund discovery and development research on their own. The fiscal benefit under section 35(2AB) of the Income-Tax Act that gives 150% weighted deduction on research spend, will expire on 31 March this year. We want it extended for 10 years and the weighted deduction be increased to 200%. 
Expenses incurred on clinical trials, bio-equivalence studies, regulatory approvals and patent filings outside India, which legitimately belong under the R-D head should also be covered under section 35(2AB).
Clinical trials in India are qualifying for tax rebate under Section 35 even now. Is there any other lacuna that you want the finance minister to look into? Is the cost of research affected on any such account?
Discovery of new drugs requires mandatory testing on animals and human volunteers to ensure toxicity, safety, etc. Such tests have to be conducted in government-approved laboratories which comply with global standards of good laboratory and clinical practices. Due to restrictions, testing on large animals has to be done overseas, and at considerable cost.
While globally these testing charges are considered as ‘business income’, no withholding tax (a tax that is retained by the payer) applies on them.  However, in India they are considered as ‘fee for technical services’ and subjected to withholding tax. The government should therefore consider modifying the provision so that no withholding tax is applied to such testing charges.
Moreover, some of the clinical research organizations and universities conducting such tests are tax-exempt and Indian companies end up bearing the tax cost. This unnecessarily increases the cost of research by 10-15%.
What about indirect taxes on the sector? Confusion over value-added tax had initially affected sales for some companies; are there any snags in the regime even now?
With regard to services provided by overseas “service providers”, Indian pharma companies are currently required to pay service tax on reverse charge method (which mandates that a receiver of services and not the foreign provider pays the service tax). It is not justifiable to shift the liability to pay service tax on the receiver of services. This needs to be reviewed and abolished.
Secondly, the present rules on central value-added tax (Cenvat) credit on ‘input services’ are highly restrictive in nature and escalate the cost of manufacturing. Cenvat credit is not available with regard to services commonly used for manufacturing, unless separate records are maintained for goods that attract excise and ones that are exempt.
Such provisions are completely illogical as it is impossible to maintain separate records for intangible items such as telephone, security, repair, transport and maintenance services. The Cenvat credit rules need to be appropriately amended to remove anomalies.
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First Published: Mon, Feb 26 2007. 12 09 AM IST
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