Union Budget 2017: An opportunity to drive innovation and rapid growth in the pharma sector

Published: January 23, 2017 4:29:48 PM

Budget 2017: The Indian pharmaceutical industry is on the threshold of becoming a major global market by 2020 with revenues close to Rs 1,652 billion.

Budget 2017, Budget 2017 what to expect, Budget 2017 latest news, Union Budget 2017Recognizing the importance of intellectual property (IP) as a driver of technological innovation, last year, the government introduced a patent box regime. (Reuters file photo)

The Indian pharmaceutical industry is on the threshold of becoming a major global market by 2020 with revenues close to Rs 1,652 billion (FY 2014-15), and is expected to grow at a 15#20% CAGR. Exports clocked revenues close to Rs 942.75 billion in FY 2014-15.1

Recognizing the importance of intellectual property (IP) as a driver of technological innovation, last year, the government introduced a patent box regime, largely similar to that followed in many countries globally. While this was a good start, the government may consider some additional aspects in order to strengthen the regime and make it more attractive for the industry. For instance, expanding the coverage of the regime beyond merely patents to include assets functionally equivalent to patents (such as designs, secret processes or formulae, copyrights, software, etc.) that can be legally registered and protected in India, would doubtless increase the appeal of the regime.

The patent box regime also does not envision any benefit in respect of capital gains. Internationally, major economies which have incorporated the patent box regime have made it holistic by including various streams of income which can be earned from the exploitation/ disposal of IP. Accordingly, the government should consider expanding the nature of revenue streams under the regime instead of having only royalty as part of this regime in order to make it a comprehensive package and a code in itself. This would ensure that income such as that from the sale of a patented product or from the sale of qualifying IP is also protected. Further, extending the regime to foreign/ non-resident tax payers may also be a good way to increase traction.

The patent box regime requires IP be developed and registered in India. A clarification to the effect that development of IP ‘outsourced’ to resident third parties/ resident group companies (under the supervision, control, and guidance of the resident taxpayer) should qualify for the preferential tax regime as the intent and purpose of the proposed provision (i.e., development in India) is satisfied, would be very welcome. A resident taxpayer may not want to invest in R&D from scratch, rather preferring to capitalize on IP partly developed by a third party/ group company. In such cases, extending the preferential regime should be considered, as long as the resident taxpayer further develops such IP by way of its own R&D, and registers the same in its name.

While the government, last year, also presented a roadmap for phasing out various exemptions and deductions for the pharmaceutical sector, this may be a good time to revisit certain specific areas that warrant attention. Specifically, companies engaged in R&D activity should be allowed to qualify for a weighted deduction under section 35(2AB) even in respect of expenditure incurred outside the R&D unit (assuming the said unit is appropriately approved by the Department for Industrial & Scientific Research). In addition, expenses incurred on intangibles acquired, foreign patent filings, etc., should also be considered as eligible under the weighted deduction regime.

Weighted deductions should also be allowed for R&D expenses under Minimum Alternative Tax provisions as well (to encourage such R&D expenses and allied activities in-country), rather than restricting such deductions to normal provisions of income computation.

There has been a demand for tax benefits by way of accelerated or weighted deductions for businesses and contract manufacturing R&D units by way of investment linked deductions. Alternatively, the demand has been to provide research credits as is done in many countries. Similarly, weighted deductions may be considered where a part or the whole manufacturing activity is outsourced by the entity incurring expenditure on specified R&D activity. It remains to be seen if the government will accede to these expectations.

Given the pace of technological advancements, the government should also consider increasing the rate of tax depreciation for all medical/ surgical/ pathological equipment to 60% (notwithstanding proposals to limit depreciation to a lower rate for all categories of assets), resulting in quicker replacement of old/ redundant medical equipment.

The vision of the Indian government is to enable the Indian pharma sector to play a leading role in the global market and ensure abundant availability, at reasonable prices within the country, of good quality pharmaceuticals for mass consumption. Advancing the good work started last year through some of these measures would certainly go a long way in achieving this objective.

(By E.N. Dwaraknath, Partner –Tax, PwC. Views are personal)

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