Photo: Bloomberg
Photo: Bloomberg

Budget 2016-17: Cuts in R&D tax breaks disappoints life sciences industry

Analysts point out simplification of tax regime could be the rationale behind the decision to decrease the weighted tax deduction on R&D

Hyderabad: The Union budget on Monday left many pharmaceutical and biotech companies disappointed due to the proposed cut of weighted tax deduction on research and development (R&D) expenses.

Finance minister Arun Jaitley on Monday in his budget speech announced the reduction of the weighted deduction from 200% to 150% from the financial year 2017-18 to financial year 2019-20 and from the financial year 2020-21 onwards the deduction will be restricted to 100%.

The Central government provides a weighted tax deduction of 200% for any capital and revenue expenditure incurred on in-house R&D by a company, excluding expenditure on land and buildings.

As venture capital and private equity firms are not showing much interest—given the risky nature of drug discovery—Indian companies rely more on tax incentives, grants and soft loans from the government, which the industry complains are inadequate and bogged down by clumsy procedures and red tape.

The Indian pharmaceutical industry spends, on an average, about 6-8% of their sales on R&D, compared to 15-20% by companies in the developed world.

The size of the Indian pharmaceutical industry is around $15.2 billion as on 2014, according to industry body Assocham and market research firm RNCOS.

The cost of discovering a single molecule and its further development, representing a journey from mind to market, is in the range of $250-500 million and takes about 10-12 years. Further, just 1% of the drugs see commercial success.

To boost innovation, the industry was asking for an increase in weighted tax deduction on R&D from 200% to 250% and expand the scope of the benefit to include R&D expenses incurred outside the facility like bio-equivalence studies, clinical studies, patent filings and product registrations.

To be sure, the government did announce some measures for the pharmaceutical sector such as encouraging innovation in the industry with a 10% rate of tax on income from worldwide exploitation of patents developed and registered in India, in addition to exemption of service tax on services provided by biotechnology incubators approved by Biotechnology Industry Research Assistance Council (BIRAC) to provide an impetus to start-up biotech enterprises and new units.

The measures failed to lift the spirits of pharma and biotech companies.

“Disappointed to see a downgrading of R&D weighted tax deduction from 200% to 150% but welcome introduction of Patent Box regime at 10% tax rate to boost IP based income," said Kiran Mazumdar-Shaw, chairperson and managing director of Biocon Ltd.

“India has the potential to be a key global R&D hub," said Saumen Chakraborty, president and chief financial officer, Dr. Reddy’s Laboratories Ltd.

“The proposed tax exemptions, specifically the decrease in R&D weighted deduction to 150%, may have an impact on innovation as it could de-incentivise the industry to spend more on R&D," Chakraborty said.

“The deduction for expenditures on scientific research (R&D) being cut from 200% to 150% beginning April 2017 and eventually phasing out from 2020 will have a negative impact on the Indian pharmaceutical industry," said Ramesh Swaminathan, chief financial officer, Lupin Ltd.

Venkat Jasti, chief executive officer of Suven Life Sciences Ltd, which is engaged in drug discovery, also expressed his disappointment over reduction in weighted deduction for R&D.

“The cut in R&D tax break, goes against the government ‘Make in India’ slogan," Jasti said.

Analysts point out simplification of tax regime could be the rationale behind the decision to decrease the weighted tax deduction on R&D.

You can’t have at one end reducing rate of corporate taxes, and you have deductions at the other, these cuts should be seen as part of the government’s initiative to move towards a simplified tax regime, said Utkarsh Palnitkar, partner and national head, advisory and life sciences practice at KPMG India.

“Given the long gestation period and risk it takes for R&D in life science as opposed to R&D of other sectors, the R&D in biotech and pharma should have been treated separately," Palnitkar said.

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