FM offers sops to pharma sector

Budget 2005-06: Pharma
The Indian Pharmaceutical industry is highly fragmented with about 10,000 manufacturing units (300 in the organized sector). The top ten companies make up for more than third of the market. India accounts for about 8 per cent of the world's pharma pie in volume terms, but only 1% in value terms. Will the recently introduced Patent Regime change all that?

Budget Measures

	Corpus for the R&D fund to be increased in phases. Stable policy environment and incentives to be provided to help the two industries become world leaders
	Units in knowledge-based industries such as pharma and biotech to be provided equity support through the SME Growth Fund
	The exemption date for weighted deduction of 150 per cent of in-house R&D facilities of pharmaceutical and biotechnology companies has been extended by 2 years to March 31, 2007
	Also, the exemption for 100 per cent deduction of profits of companies carrying on scientific R&D, which is approved by the Department of Scientific and Industrial Research has also been extended by 2 years to March 31, 2007
	Custom duty for 9 specified pharma and biotechnology machinery cut to 5 per cent
	Corporate tax pruned to 30 per cent from 35 per cent

Budget Impact

	The extension of deduction for R&D expenditure is a positive for the big players in the domestic pharma sector. However, the industry had expected such exemption to continue upto 2010, which did not happen
	The pruning of corporate tax too will positively impact pharma companies.
	However, the budget was silent on span of control of NPPA's, as well as the new patent regime

Sector Outlook

Though the budget theme for the India pharma and biotechnology sector is a positive promising stability in policy, the industry would not be overtly satisfied with what they got. For one, though the FM did extend the exemption date on weighted deductions, he did not allow regulatory and legal expenses incurred on patent challenges to be included in this. The industry's long standing demand of 100 per cent tax exemption on overseas earnings accruing from out licensing of IPRs, if re-invested in R&D, was also not met. The role of NPPA has also not been made clear.

Net, net Budget 2005-06 left much to be desired by the pharma sector. Notwithstanding this, the policy movement is clearly forward and progressive. Our outlook on the Indian pharma sector is thus, selectively positive over the next 3 to 5 years.

Industry Wish List

Dr. Brian Tempest, CEO - Ranbaxy Laboratories Limited "R&D should be encouraged by not only continuing fiscal incentives but by enhancing such incentives in order to make India competitive in the global market place. This will help the country leverage its scientific skills."
	The weighted deduction for R&D expenditure should continue upto 2010 and should be enhanced from current 150 per cent to 200 per cent. To improve international competitiveness this must also allow expenditure incurred for regulatory and legal expenses incurred for patent challenges outside India, as well as for land and buildings for new R&D facilities.
	100 per cent Tax exemption on overseas earnings accruing from out licensing of IPRs, if re-invested in R&D.
	The span of control of NPPA to be reduced. A Settlement Commission to be appointed to avoid delays in litigation.
	Custom duty cuts for life saving drugs.

Budget over the years

Budget 2002-03

Budget 2003-04

Budget 2004-05

The Finance Minister announced a 'significant reduction in the span of control' of the DPCO.

The 150% exemption that is available on the R & D expenditure would now include the costs of filing a patent, the cost of clinical trials and the cost of bio-studies.

The budget has also hiked the allocation for the health and family welfare ministry from Rs 4920 crore (Rs 49.2 billion) to Rs 5780 crore (Rs 57.8 billion) for the year 2001-2002. Of this Rs 180 crore (Rs 1.8 billion) would be allocated to combat AIDS.

Anti AIDS drugs to be fully exempt from excise duty.

Specific drugs used for treatment of Cancer and other critical diseases would be exempt from custom duty. Incentives earlier given on such drugs, which are now manufactured indigenously, have been charged 5 per cent customs duty.

Customs duty on Glucometers used for diabetes reduced from 25 per cent to 10 per cent.

All drugs and materials used in clinical trails to enjoy customs and excise duty exemption.

The list of life saving drugs that enjoys tax exemptions or concessional tax rates of 5 per cent to be expanded.

Customs duty on Glucometers and Glucomteric strips reduced to 5 per cent from existing 10.

The government has proposed a health insurance scheme. As per this insurance plan, an individual will get a cover of Rs 30,000 in case of hospitaliation for a premium of just Rs 365 a year. The government aims to bring 5m families who are below the poverty under the coverage of this scheme.

Concessions under the section 10 (23G) to be granted to institutions lending to hospital with more than 100 beds. Depreciation rate on life saving medical instruments increased from 25 per cent to 40 per cent.

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