Mumbai: Public hospitals and speciality healthcare and research institutions operated by charitable trusts can no longer avail tax exemptions on revenue they earn from performing clinical trials, a profitable and growing business opportunity.
An amendment to section 2(15) of the Income-tax Act—which defines what a charitable purpose is—that came into force in April stripped such institutions of the tax breaks they enjoyed despite conducting such research for commercial gains, often for overseas drug companies. Such institutions could now come under the income tax (I-T) department’s scanner.
Clinical trials have emerged as a business avenue for several leading hospitals across the country, a majority of them speciality institutions and research centres run by trusts registered under the charitable trusts Act of various states. They perform research in fields such as cancer, cardiology and women and child healthcare.
Trusts are regulated by charity commissioners under state governments.
Because most commissioners are unfamiliar with clinical research, they often can’t differentiate it from normal charitable activity, allowing some institutions to get away with tax exemptions they are not entitled to.
According to healthcare industry estimates, India has 500,000 hospitals and at least 20% of them, or 100,000, are run by charitable trusts. Some 2,000 of them are speciality hospitals that conduct clinical trials.
According to a January study, conducted jointly by Yes Bank Ltd and the Organisation of Pharmaceutical Producers of India, the contract research and development market in India is expected to expand to $3 billion (Rs15,060 crore) by 2015.
The size of the market was $430 million in fiscal 2008 and it has been growing at the rate of 75% annually. Contract research is mainly the research work outsourced to India by global drug makers and at least two-thirds of it relates to clinical research.
Over the past three years, clinical research has become a profit-making industry, and is purely commercial in nature, said Kishore P. Ghiya, a trustee of Rajkot Cancer Society, which runs the VR Desai Cancer Research Institute, a speciality hospital in Rajkot, Gujarat.
“This activity is purely commercial. Clinical research organizations, or CROs, are carrying out this activity on behalf of drug companies for (the) sole purpose of profit, and there can be no scope of medical relief in an activity which is carried out as a trial on patients for finding out (the) usefulness of a particular drug or components of drug under research,” he said in a letter to the chairman of the Central Board of Direct Taxes (CBDT).
Ghiya, who asked CBDT to look into a possible nexus between hospitals and CROs, is concerned that donors to the trust may hesitate to continue supporting it as doctors and management of its cancer speciality hospital have been undertaking trials for drug makers, and wants a clear line drawn between commercial and charitable activity. He added that “the organization cannot claim tax benefit of scientific research as per section 35(1) (ii) of Income-tax Act, where the organization has to do original basic research and (the) parameters of research are designed by hospitals.”
A person from the Mumbai-based Tata Memorial Hospital, which focuses on cancer treatment and research, said the institution was aware of the income-tax regulation and is “already in the process of compliance to maintain separate books for such activities, if any”. The person didn’t want to be named.
A spokesperson for CBDT said action will be taken against entities that violate the rule relating to tax exemptions, but declined to comment on any specific cases.
The amendment to the Income-tax Act specifies that the “advancement of any other object of general public utility” shall no longer be considered a charitable purpose if it involves “any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business”.
According to an income-tax circular issued in December, the amendment was made because “a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility”.
However, medical charitable trusts can continue to claim tax exemption under section 35(1) (ii) and section 80G of the Income-tax Act for providing other charitable social services which do not have any commercial benefits.