Budget 2006: Will it deliver?

Indian Pharma is at an inflection point and the industry needs a dream budget, more than ever, to get back on its growth path. Deepali Gupta talks to the industry associations about their expectations from the forthcoming budget.

In many ways, last year was a watershed for the Indian pharma industry. First came the product-patent regime, and then came VAT and finally a slew of litigations against Indian companies hampering their export opportunities. As a result, growth rates plummeted; bottomlines nosedived and not surprisingly, the stock markets hammered down the net worth of the pharma industry.

While these may be viewed as teething problems for a sector bracing itself to integrate with highly competitive global industry under the new trade norms, they have exposed the need for structural policy reforms in the pharma sector.

The industry believes that while the tax reforms need attention, the real focus of the Finance Minister should be to effect structural policy reforms, if the country is to realise its dream of becoming a global leader.

Modifying the existing drug policy controls is on the top of their policy agenda. The industry wants the FM to revamp the existing system of price control by a simple, less intrusive, and transparent system of macro management to cover only formulations. With WTO trade norms, industry feels that the price control of bulk drugs has become unnecessary.

Another focus area is to promote investments in R&D. While there was a mention of creating a policy framework to encourage R&D in the last year's budget, no substantial progress has yet been made. The industry is also keen on the Budget providing tax holidays for new research. Expenses incurred on regulatory approval including clinical trials and review of drugs by drug control authorities need to be included in weighted deduction.

The industry is also expecting the Budget to develop and implement clear guidelines for all stages of clinical trials to counteract delays and expediting the patent. Another important aspect the industry wants the FM to tackle this year is to beef up the patent infrastructure of the country. At present, the infrastructure to deal with patent applications in the country is woefully inadequate. There is dire need to increase the number of patent offices and examiners in the country; modernise patent offices and provide training to the concerned officials to educate them about product patent system and EMR.

In fact to get a low-down on industry expectations, we spoke to some of the leading pharmaceutical associations to assess their budget expectations and the impact it could have on the industry.

Stable policy and research incentives

Ranjit Shahani, President of OPPI and Vice-Chairman & MD, Novartis India

If given a conducive environment, the pharmaceutical industry in India has the potential to emerge as a global powerhouse. To plan strategically, we need a long-term framework in place. Tax policies and export incentives should be long-term and consistent.

For sake of research

Presently a weighted deduction of 150 percent is granted on R&D expenditure. But the benefit will be allowed only till March 31, 2007. Considering that drug discovery is a lengthy, risky and expensive proposition, we would like the term of this benefit to be extended to March 31, 2017.

International clinical trials carried out in approved hospitals in India should also be included in this tax incentives scheme as these trials are an integral part of the discovery process. Positive response from the government to this proposal will attract investments in CROs and increase Indian participation in global clinical trials.

Funding by the government to promote R&D should be of primary importance, as discovering new chemical entities will help the Indian pharma industry to make its mark globally. A technology fund can be created to help SMEs upgrade their facilities to comply with the latest Good Manufacturing Practices (GMP).

Stabilise Custom Duty

The OPPI has proposed reduction in basic customs duty to five percent for drug intermediates and bulk drugs and 10 percent for formulations from the existing 15 percent. This suggestion is in line with the Chelliah Committee's long-term fiscal policy recommendation of lowest duty on basic materials and higher duty on finished goods. Over the years, the trend is towards reduction in customs duty and I hope this year will not be an exception.

Customs Duty (CD) on some life-saving drugs ranges from five percent to 15 percent. In reality, the 15 percent import duty has an additional 16 percent countervailing component (or CVD) and education cess taking the total to a staggering duty impact of 34.7 percent on finished formulations. Life-saving drugs should be fully exempt from customs duty, there revenue loss on the exchequer will be insignificant and drugs will be available to patients at reasonable prices. There should be a mechanism to grant exemption or reduction any time within the fiscal year to deserving candidates.

Break free from price control

To improve the access of quality medicines at reasonable prices, a forward-looking pricing policy based on price monitoring rather than price control is necessary. It is an acknowledged fact that medicine prices in India are considered to be the lowest in the world. It will be in the interest of the consumers to continue the trend of reducing the number of drugs under price control from 347 in Drug Prices Control Order (DPCO) 1979 to 74 in DPCO 1995, and allow market forces and competition to regulate the prices. To make a mark internationally, the Indian pharmaceutical industry needs to invest more in R&D and this is possible only if it is freed from the shackles of price control by generating enough surplus to be ploughed back into research.

In the interest of the consumer

At present, medical insurance covers hardly 3.5 percent of Indian population. By liberalising the medical insurance sector, more people will be able to get access to modern medicine and this will result in improved public health. The speed of legislation for the pharma industry should be accelerated so that new projects can be implemented and the benefits reaped. We have already lost time. The contentious issues with respect to definition of patentability and data protection should be nailed. India is at the inflection point and there is a tremendous opportunity if world-class IPR is implemented expeditiously.

Clearer FBT and duties

Suresh Kare, President IDMA, and Chairman and MD, Indoco Remedies

Certain materials are being imported under the guise of raw materials, but they are actually finished products. For instance, powder is imported and converted to granules and sold here under special licences. That should not be allowed, countervailing duty should be charged on such products. If import-related benefits are going to be provided, substantial change has to happen in the product. We did propose a reduction of custom duties, from 16 to eight percent in the larger interest of the SMEs. Another advantage of lower duties will be to stop companies from migrating to excise free zones.

Keep benefits on fringe

We have many objections to the FBT. Ideally, it should be done away with. However, if it has to be charged, it should be restricted to benefits only.

The Finance Minister said in his Budget speech, that FBT is a measure to tax the benefits given by the employer to employees. However, as it turns out, they are taxing genuine business expenses such as physician samples. It is allright to tax travelling allowances but travel abroad for work or sales promotions should not be taxable. The government has realised that this was a mistake and has suggested changing it.

Many years ago, it was suggested that four percent of the value of sale could be used as samples without paying excise. That should be reinstated.

In the interest of SMEs

For R&D the government should increase the fund to Rs 2,000 crore at least. R&D has to be supported, because it is the backbone of the industry today.

Apart from that, we are hoping for a revision of the exemption limit to Rs 3 crore, loans under capital subsidy scheme to be raised from Rs 40 lakh to Rs 1 crore. The rate of subsidy should be increased from 12 to 15 percent and interest subsidy should be provided. A five percent interest subsidy has been proposed, but we have to wait and watch until the Finance Ministry decides.

Bigger boost for SMEs.

SR Vaidya, Co-Chairman SSI Committee, IDMA and S V Veerramani, Chairman IDMA, Southern Command and Managing Director, Fourrts India

From the SME sector, we are eagerly anticipating a reduction in central excise duty from 16 percent to eight percent. With the introduction of MRP-based excise duty, 16 percent excise duty has harmed the prospects of SME sector in their outsourcing opportunities. This coupled with the demand of larger companies to set up manufacturing base in excise free zones has virtually shut the growth of SMEs. This is because the SMEs are unable to establish a separate manufacturing base away from their states incurring infrastructure and overhead expenses. We recommend raising the excise duty exemption limit from Rs 1 crore to Rs 5 crore, as provided in the recommendations from the Minister of Chemicals to the Minister of Finance. These measures are badly required for the survival of the pharma SSIs.

The pharmaceutical industry heavily depends on sales promotion to doctors, which includes scientific literature and physician samples. A Fringe Benefit Tax on all these is indeed a burden. Besides sales promotion, employees and marketing professionals need to travel in order to reach the customers. A tax on travel and accommodation cuts into the basic requirements of the pharmaceutical industry. Marketing personnel also need to be trained to meet highly qualified physicians. A tax on training of these employees is not realistic. Foreign travel expenses can be removed from the purview of FBT to boost exports. It is also ironical that a loss-making company should also pay FBT on their promotion.

More R&D funds for SMEs

As far as R&D funds are concerned, the limited R&D fund apportioned by the Department of Science and Technology can be allocated to the SME sector since the amounts are too small for bigger organisations. Further modifications in the weighted reduction for R&D expenditure will be most welcome. The new deduction can be up to 200 percent and applicable for a period of 10 years.

Although SIDBI has come out with Credit Linked Capital Subsidy Scheme scheme for SMEs with a loan up to Rs 1 crore and capital subsidy of 15 percent, it is not reaching majority of SMEs. This is because of high stipulation of collateral securities even to the level of two to three times of the loan amount from SIDBI. Therefore, these schemes are only on paper.

There is also a recommendation from the Minister of Chemicals to provide a five percent reduction in the interest burden for SMEs.

Reduce control

We would prefer to have less control on drug prices and more freedom for market forces to operate which will certainly bring down the prices of drugs.

The number of drugs under price control needs to be reduced. In case a drug price monitoring system has to be introduced, then it should be more advisory than punitive.

Tax incentives and wiser disbursement

D G Shah, General Secretary, Indian Pharmaceutical Alliance

If the government wants the Indian pharma industry to stay at the forefront of the knowledge revolution, it needs to implement regulations to support R&D. Otherwise we will miss this transformation quite like we were left behind in the industrial revolution. Today the industry is investing up to Rs 1,500 crore per year and the total investment is likely to touch Rs 10,000 crore in a five-year span. This investment is in anticipation of governmental support. However, if that does not come through, companies will consider going to places which offer these benefits.

At the moment, the average contribution of the government, inclusive of tax incentives, to R&D initiatives amounts to a mere eight percent. In the US and Europe, organisations receive as much as 50 percent by way of tax credit for research. We propose the government put in place clauses to ensure the system cannot be abused, for example, a company should get tax credit only if it is profitable.

An important aspect is that all research funding and tax grants should span across all therapeutic areas, and not specific ones. Companies will not conduct research just because a grant is available, they will do it based on economic viability.

Wise usage

The disbursement of the Rs 6,000 crore that will be collected by the proposed two percent health cess needs to be considered carefully. In the proposed policy, a large part of it has been set aside for sponsoring medicine. Not only will that be a source of abuse and corruption, it is important to remember that rather than just consuming this money, it will be wiser if it is invested for better causes like expanding the health infrastructure on the lines of AIIMS and NIPER.