Budget 2021 expectations for Life Sciences and Healthcare: Most apt time to receive its fair share

Updated: December 23, 2020 12:14 PM

Union Budget 2021 Expectations for Healthcare: Knowing the immense contribution which the healthcare sector has provided all through 2020, the sector itself now deserves good care and treatment from the Honourable Finance Minister and her team.

Economic Survey of India 2021, Budget Economic Survey 2020-21The Covid-19 pandemic is yet another reminder of havoc that communicable diseases can create, but the risk posed by non-communicable diseases (NCDs) cannot be undermined either.

By Shuchi Ray and Rajiv Bajoria, 

Union Budget 2021-22 Expectations for Healthcare: The pandemic has taught the world that health and its due care is of pivotal importance and supersedes everything else. Knowing the immense contribution which the healthcare sector has provided all through 2020, the sector itself now deserves good care and treatment from the Honourable Finance Minister and her team.

The foremost expectation is that the Budget should focus on increasing public spending on healthcare. The total expenditure by the Centre and states for FY20 was 1.29% of GDP. Of the total public expenditure, the Centre’s share is 25% (the Centre spends less as public health and sanitation are on the State list). Let’s see where does India stand vis-à-vis others? India’s total healthcare spending as per OECD, is way lower than that of other countries. The average for OECD countries in 2018 was 8.8% of GDP. India spends the least (3.6% of GDP) among BRICS countries as well. No doubt that ill-health is one of hindrances in the growth of the economy, and hence, there should be adequate budget for the sector, which consequentially will benefit the entire economy. Covid 19 has brought the emphasis on public spending, creating the real need for public hospitals, and therefore, Government schemes providing subsidized loans and land for setting up the hospitals, is the need of the hour.

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Coming to the growth of the industry, it has been experienced and amply deliberated that the same would depend upon the stimulation of local demand of healthcare in India. The global healthcare players, while making investment / expansion decision, consider not only the low cost of manufacturing, but also the demand that local market could generate. Hence, there is a significant need for reviving the local demand. One of the measures could be to provide the viability gap funding by the government for investors who setup hospitals in smaller cities to increase the provider base for Ayushman Bharat, coupled with an increase of package rates of Ayushman Bharat for more hospitals. Such initiative would automatically give boost to medical devices sector. Further, Tax holidays similar to that existed earlier for rural hospitals, could be re-introduced, with a flexibility of selecting the beneficial years.

On the front of research and development (R&D), it has been the earnest desire of every Indian that India is recognised as a global innovation hub. The pandemic has also taught that there is clearly a requirement for collaboration of private sector players with academia, scientific experts, and governments to undertake drug discovery. Requisite incentives should be brought in to develop this collaboration and make it meaningful for the stakeholders.

Currently, the global investments into R&D are estimated at more than USD 2 trillion, of these, private sector is the major investor. In developed and emerging economies, the private: public investments into R&D are generally in the ratio of 2:1. The gross expenditure on R&D financed by industry was around 60% in 2011 in the OECD countries, whereas, at the same time, the percentage of R&D financed by Government was around 30% in OECD countries. On the other hand, in India private investments into R&D are estimated at only half of that of the public sector. It is in the national interest of India to stimulate the private sector engagement into R&D and aim at public: private sector investments into R&D at levels of 1:1.

One would also agree that the pace of technological progress is directly proportional to the efforts on R&D. The expenditure levels on R&D could, therefore, act as reliable indicators of innovative capacity. From tax perspective, it is vital to attract the R&D players to India by providing tax incentives. The incentives such as Gift City or erstwhile SEZ should be introduced to incentivise investments into contract R&D to develop and leverage the human capital resource of India. In the same context, it is pertinent that the patent box regime as per section 115BBF of the Income tax Act should be improvised to allow application of the reduced tax rate even to assignees / transferees of the patent and not restrict such benefit to only the true and first inventor of the invention. Further, introducing a reduced tax regime on commercialization of the patents should also be deliberated and be made practical to enable the taxpayers to avail the benefit of the regulation.

From GST perspective, the Government can very easily make healthcare more affordable by taking an immediate step of making ‘zero rating’ of GST for healthcare services. This will achieve the twin objectives of keeping the credit chain intact and will ensure that tax is not loaded in to the cost of healthcare services. Further, for life saving drugs, Goods and Services Tax in India is taxed at four separate rates NIL, 5%, 12% and 18% on medicines and medical supplies. It is recommended that all life-saving drugs be categorized at the lowest rate of tax under GST.

Another aspect vis-à-vis GST is the tax credit on expired goods. The expiry of the medicines ranges from 2-3 years from the date of manufacture. Since, medical best practices require the manufacturer / distributor etc. to safely dispose of the expired goods, at times, they have to take back expired items from trade channels. It is recommended that the time limit prescribed under law, to adjust the Tax liability of credit notes only until September of the next financial year in which the supply was made, may be relaxed in case of expired medicines which are returned to the manufacturer/ wholesale dealer. Alternatively, it is recommended to clarify that the relevant rule will not require reversal of input tax credit for products consumed by healthcare industry.

Given the fact that the private health sector has made a relentless contribution and stood by the government in managing the pandemic, one would strongly hope that this sector is provided due impetus in Budget 2021.

(The authors Shuchi Ray and Rajiv Bajoria are Partner with Deloitte Haskins & Sells LLP. Views expressed are personal.)

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