New Delhi: Even as more Indian pharma companies spin off their research arms into separate companies in an effort to de-risk their own operations and attract much-needed investments in research, the industry as a whole is lobbying the government for a tax incentive that will improve the prospects of these new “research-only” companies.
The incentive will give a 10-year tax holiday to companies that conduct only commercial research.
Even the government departments that oversee the functioning of the pharmaceutical industry are demanding that the incentive be part of the Budget that will be presented on 29 February. One executive in a pharmaceutical company described this as “more important than any (other) benefit.”
Companies including Dr Reddy’s Laboratories Ltd (Perlecan Pharma Pvt. Ltd), Sun Pharmaceutical Industries Ltd (Sun Pharma Advanced Research Co. Ltd, or Sparc), Ranbaxy Laboratories Ltd and Nicholas Piramal India Ltd have already spun off their research arms into separate companies or are in the process of doing so.
Sun Pharma has even listed its entity, Sparc, on the stock exchanges.
Not everyone is convinced these firms need the tax break or that they should be given one for free. Amit Sengupta, a public health advocate, said that firms enjoying such benefits should be obliged to conduct some research relevant to Indian patients and inexpensive drugs.
Nicholas Piramal director, strategic alliances and communications, Swati Piramal said three types of companies would benefit from such a provision: “There are pure research units that were being hived off by big drug makers, the companies coming out of academic research institutions and lastly, the start-ups by scientists that will gain,” she said, adding that unlike automobiles or information technology where research yielded results in a few years or a few months, research into new drugs is risky and can take as much as a decade.
There is a tax holiday benefit already available to research firms: under section 80 IB (8A) of the Income-tax Act, 1961, a tax holiday of 10 years is given to those companies that are registered in India, engaged exclusively in research and development and been approved by department of scientific and industrial research before 31 March 2007.
There are 45 companies that are eligible for this benefit. However, new drug research companies created by Ranbaxy, Nicholas Piramal, Wockhardt Ltd, Dr Reddy’s and those being planned by others have missed the bus and can’t avail of the benefits unless the provision is reintroduced for another five years, till March 2012.
Their demand has been supported by industry lobbies such as Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry, Assocham and by the ministry of chemicals and fertilizers, and ministry of science and technology.
Ranbaxy’s managing director Malvinder M. Singh termed this provision “absolutely important” if India wishes to become a drug research hub.
“The tax relief will provide a signal for people to come in and invest in these research companies. This can be a propeller and a facilitator,” added Singh, who has just got the go-ahead from the Ranbaxy board to create and list Ranbaxy Life Sciences Research Ltd.
“Any benefit that can give a leg-up to research is good. These small fledgling enterprises will anyway contribute a negligible amount to the exchequer and should be nurtured as much as one can. There will be a time to tax them but this is not it,” said Sujay Shetty, associate director with audit and consulting firm PricewaterhouseCoopers.
The ministry of science and technology has told the finance ministry that revenue loss on account of the tax holiday, if it is introduced, will not exceed Rs50 crore.
Shetty added that the R&D spin-offs were anyway “disadvantaged currently” because of lack of clarity on whether they qualify for 150% weighted tax deduction on their in-house research spends like their parent companies.
These “fledgling” research firms could be worth their weight in gold over time. Piramal estimates that if the research units of the top 20-25 Indian drug makers were split and listed, they would be worth more than $100 billion (Rs3.9 trillion) in market capitalization by 2013. The top 11 Indian drug makers spent 4-9.6% of their revenues, or a total of Rs1,777.4 crore, on research in 2006-07. The spend, on average, had increased 26% over the previous year.
Sengupta, the secretary of Public Health Movement, said there wasn’t really a need for a tax holiday because “India has a patent regime” and companies coming up with a new drug would enjoy “monopoly pricing.”