Tax incentives on the research and development or R&D spends of pharmaceutical firms may not be extended to dedicated research arms that some of these companies have created by spinning off their research activities, primarily because of conflicting views of various government agencies.
The department of science and technology, the government wing which overseas the development of scientific research and related activities, suggests that any research projects approved by the department should be eligible for tax incentives.
India’s drug price regulator National Pharmaceutical Pricing Authority (NPPA), however, says that since the new drugs coming out of these fully dedicated research entities are anyway exempt from price control, the units do not deserve any additional incentives.
Companies creating these new research arms are betting that they will be able to create products for the global market, says NPPA, and the only way these can become eligible for tax incentives is if there is an assurance that the products would be brought under the ambit of price control laws.
According to an NPPA official, who did not wish to be identified as he is not authorized to speak to the media, the agency is yet to send a formal note to the ministry of finance in this regard.
“Research companies do not need the tax incentive as they undertake outside research projects along with in-house R&D and can very well hedge the risk of investment,” the official said.
Indian drug makers such as Dr Reddy’s Laboratories Ltd, Sun Pharmaceutical Industries Ltd and Orchid Chemicals and Pharmaceuticals Ltd have already hived off their new drug research activities into separate companies.
Other leading firms such as Ranbaxy Laboratories Ltd, Nicholas Piramal India Ltd and Wockhardt Ltd have announced plans to spin off their research arms into separate entities.
Some of the companies that have spun off new entities have managed to attract additional capital from public investors or institutional investors and venture capital companies.
Currently, the drug companies are given 150% weighted exemption under section 35 (2 AB) of the Income-tax Act for in-house research expenditure. This translates into government subsidy to the extent of 10% of a firm’s R&D expenditure.
“If the Union Budget doesn’t pass on this benefit to the newly created R&D companies, it is going to be a major setback for the overall R&D strategy of many leading Indian drug firms,” said Sujay Shetty, an associate director (pharmaceutical and life sciences practice) at audit and consulting firm PricewaterhouseCoopers.
Dilip G. Shah, secretary general of the Indian Pharmaceutical Alliance, an industry body that represents research-led pharmaceutical companies in India said NPPA’s “view does not take the new challenges and changing phases of the Indian drug sector into consideration.”
“If there is no support from local government, the research led companies can go and set up shop abroad where even foreign research projects are treated with equal weightage as far as fiscal incentives are concerned,” Shah added.
The pharmaceutical industry is lobbying the finance ministry for increasing the benefit of 150% weighted exemption to R&D expenditure to 200%. It has also demanded extension of this benefit to depreciation of investment made in land and building for dedicated research facilities, expenditure incurred for obtaining regulatory approvals and filing patents abroad.
Mint could not independently ascertain whether the finance ministry is considering any of these requests for inclusion in the coming Union Budget.