Budget 2022 expectations for pharma: Govt must support innovation & focus to enhance operational efficiency

By Bhanu Prakash Kalmath SJ and Biren Vyas
India holds a special place on the global pharmaceuticals map. The sector has grown at a consistent pace to emerge as the third largest producer, by volume, in the world with a leading position in supply of generic drugs and low-cost vaccines.
Last couple of years have seen India’s pharma sector rise to the unprecedented challenge presented by the Covid-19 pandemic.
The domestic sector, currently estimated to be around $42 billion, is expected to grow in double digits to reach around $130 billion by 2030.
As we look to the future, Indian pharma and biotech companies will need to accelerate their efforts for the next stage of growth by strengthening presence across developed markets and ramp-up new product and technology capabilities through organic and inorganic routes.
The sector witnessed major disruptions due to the pandemic which has led players to shift focus towards de-risking of their supply chains and manufacturing operations. Additionally, capacity expansion in sensitive APIs, intermediates, biopharmaceuticals, and medical devices would be critical for growth.
India lags on innovation and R&D in pharma as compared to some of the large economies. Impetus on this front would unlock new opportunities for India on the global pharma value chain.
The government has undertaken several progressive initiatives to strengthen the domestic manufacturing ecosystem, such as the Production Linked Incentive (PLI) schemes, schemes for promotion of bulk drug parks, medical devices parks, among others.
Budget FY2022-23 is expected to build on the momentum and address key challenges faced by the sector to achieve the vision of ‘AatmaNirbhar Bharat’.
Focus on Capacity Expansion
Enhanced outlay on Production Linked Incentive (PLI) schemes will further encourage investments in capacity expansion for sensitive APIs, complex excipients, drug intermediates, biopharmaceuticals, manufacturing of vaccines and medical devices. Previously, Merchandise Exports from India Scheme (MEIS) benefits were available for specific pharma products under Foreign Trade Policy.
However, exclusion of the pharma sector under the Remission of Duties and Taxes Exported Products (RODTEP) scheme launched in January 2021 excludes pharma products from availing benefits, which might deteriorate working capital position. Identification and inclusion of specific pharma products in the revised list of products eligible for the RODTEP scheme would be beneficial for the sector.
Support Innovation
Due to the current situation and changing business dynamics, pharma entities need to focus on high-end innovation and that too within a short span of time. Therefore, pharma players must invest in the best of the technologies and employ top experts to stay ahead on the innovation curve.
Hence, the government of India should consider restoring a higher percentage of deduction for expenses incurred towards R&D under section 35 (2AB) of Income Tax Act. It would encourage innovation and R&D in the country. Currently, regulatory norms for clinical trials take a long time for products imported from developed countries.
Even for key products like vaccines, clinical trials and approvals might take more than one year. Streamlining regulatory requirements related to clinical trials without compromising risk would strengthen the sectors’ growth and reduce time to market. Additionally, lower GST for such clinical trials and research and development services would help to grow this sector.
Cost impact on taxation of royalty income from the use of Intellectual Properties (IPs) should be minimised at least during the initial few years to bring the latest technology to India.
Focus on Operational Efficiency
Clarification on ambiguity around allowability of market cost like free sample distribution to medical practitioners under the Income Tax law would put an end to protracted litigation in this sector. Even ambiguity prevailing with regards to availability of input tax credit under the Goods and Services Tax on expenses incurred for Corporate Social Responsibility needs clarification, not only for the pharma sector but beyond as well.
The Organisation for Economic Co-operation and Development has clarified Transfer Pricing perspective about adjustments of Covid-19 related expenses. However, clarification on a similar line from the authorities regarding Indian Transfer Pricing perspective would help ease its implementation.
Further, the extension of reduced tax rate of 15% u/s 115BAB under Income Tax Act to incentivise the existing entities for expansion and capital gains exemption on startup investments would not only help the pharma and medical devices sector, but the industry at large.
Guidance from the authorities on these key issues would enable businesses to focus on core activities, enhance operational efficiency and also offer cost-effective products which will improve the affordability aspect of healthcare.
Overall, concentrated focus on core sectors like pharma with quick implementation and resolution through the budget would reinforce India’s position as the preferred pharma manufacturing destination in the world.
(Bhanu Prakash Kalmath SJ is Partner & Sector Leader – Pharma & Healthcare and Biren Vyas is Partner Grant Thornton Bharat LLP. Views are personal)

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