Lost opportunity?

Though there is nothing much to crib about, the Union Budget had defied expectations that the industry had on reform. Katya Naidu tries to understand Budget and its impact on the pharma industry.

In times when the economy is in the pink of it health with a robust economic growth in GDP of 9.2 percent in 2006-07, the Union Budget has surprisingly turned out rather blue with infrequent mention of reforms. The industry too wasn't happy with shades of grey that the Budget has brough with it like the levy of fringe benefit tax (FBT) for employee stock options (ESOPs).

The agriculture and education partial Budget might just be what the UPA government needs soon after a loss of elections in Punjab and Uttarakhand and the scorn on inflation. This so-called populist Budget is not very popular with the Sensex as well which did nothing to stop the crash which came as a collision effect from Chinese stock markets.

But experts agree that there were no drastic steps in the Budget, leaving less for people to wonder about; a reaction which is coined as "mild tinkering". "It is a good Budget. But is it a great Budget? I don't think so," commented Ajay Piramal, the Chairman of Nicholas Piramal.

On the positive side, there was progress and action on National Goods and Services tax. As a part of this process, phasing out of Central Sales Tax is on track with the reduction of one percent to three percent. In spite of the disappointments over the fact that no changes were mentioned on the CENVAT or service tax rate, there were certain aspects which indicate the robustness of the economy like the higher amount of direct than indirect taxes which is characteristic of developed nations.

Mentioned somewhere at the end of the report was the pharma and biotech sector which was given but less attention. The industry stalwarts react to the effect on Budget on the industry in general and pharma industry in particular.

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VERDICT Not very happy

Satish Reddy
Managing Director & COO
Dr Reddy's Laboratories

From a pharma perspective, the Budget has again turned out to largely be a non-event. There is no doubt that the extension of the weighted average deduction of R&D expenditure (which is welcome), a marginal reduction in the customs duty of specified machinery and the exemption from service tax on certain clinical research are positives. But there is nothing in terms of bold moves that will change the trajectory of growth of the industry or decisively impact public health.

While health is a state subject, it is clear that few states have the money to make a difference and the Finance Minister has chosen not to make an effort to alter the status quo.

VERDICT Dream not fulfilled

Ranjit Shahani
President of OPPI
Vice-Chairman and Managing Director
Novartis India Limited

While the pharmaceutical industry completely missed the FM's radar last year, we were hoping to be compensated by a "Dream" pharmaceutical Budget this year but alas that was not to be.

The allocation of Rs 1290 crore for elimination of polio and clinical trials exempted from service tax for new drugs are certainly welcome as is the removal of samples to doctors from the FBT ambit. However, the major need for bringing down transaction cost of the pharmaceutical products by reducing Excise Duty from 16 percent to eight percent has once again been given the go-by. Also, life-saving drugs should have been fully exempted from Customs Duty to reduce price.

VERDICT Relieved!

Kiran Mazumdar-Shaw
CMD
The Biocon Group

The Budget reflects the robustness of the Indian economy with no nasty surprises. The disappointment though is the levy of a FBT on ESOPs, which is unwarranted when industry is challenged with attrition.

In terms of industry sector specifics, the biotech and pharma sector can heave a sigh of relief as the 150 percent weighted average tax deduction on R&D has been extended by five years. Other measures which auger well for the biotech sector include the service tax exemption on clinical trials and new drug research. Thank you Mr Chidambaram for a well conceived and balanced Budget that addresses innovation, investment and inclusive growth—a formula that can deliver sustainable economic development for India.

VERDICT Still neglected

Suresh G Kare
Chairman & Managing Director
Indoco Remedies

There is nothing in this year's Budget that will push growth rates of pharma companies. On the contrary the increase in Dividend Tax from 12.5 percent to 15 percent and the additional cess of one percent, will impact profitability. The 150 percent weighted deduction on R&D spend has been extended by five more years. Industry had asked not only for the extension but also for an increase of the deduction to 200 percent considering the high cost and risk involved in pharma research.

Unfortunately, pharma industry continues to be the neglected industry as despite several representations supported by our Minister to reduce Excise Duty from 16 percent to eight percent, same has not been accepted by the Finance Minister.

VERDICT Balanced

Vimal Kumar
Director
Shasun Chemicals & Drugs

The extension of the weighted average deduction of 150 percent, under Section 35(2AB), for another five years will be a great boost to the research and development activities of pharma companies. Further, the move to exempt service tax on clinical trials and cut in duty for pharma research equipments will be beneficial to the overall safety and efficacy. However, increase of Dividend Distribution Tax to 16.995 percent is detrimental to the corporate world.

Also, taxation of EOU units under MAT will be against the interest of companies having EOUs. Though the focus of the Finance Minister was on IT companies, unfortunately all manufacturing companies will also get affected. The effective tax rate of companies having units as EOUs will increase substantially. Also, issuance of ESOP will increase the employee cost to the company. It is a clear instance of double taxation.

VERDICT Not Encourating

Dr Raja Smarta
MD
Interlink Marketing Consultancy

The pharmaceutical industry has not found a place of pride in the Budget as a knowledge driven industry with high growth potential in global markets. Pending the finalisation of new pharma policy, the Budget could have provided a stimulus to provide will deserved relief and a driver for accelerated growth. By and large, the Budget is far from encouraging for the pharmaceutical industry.

VERDICT Growth friendly

R C Juneja
Managing Director
Mankind Pharma

The overall direction of the Budget 2007-08 is positive for the pharma sector. Indian pharma sector has the potential to play a larger role on the global map and the present Budget recognises this. Reduction in customs duty on machinery for R&D from 7.5 percent to five percent will be a boon for the pharmaceutical sector, total exemption of service tax on clinical trials of new drugs in the country is also a welcome step. We were expecting a reduction in the excise duty, but that has been ignored.

VERDICT Helpful

Dr Kamal Sharma
Managing Director
Lupin

The extension of R&D sops is welcome and will provide impetus to the pharma industry in particular to carry on the intensive R&D efforts. However, it would have helped to extend the scope of such sops to other allied and incidental activities pertaining to R&D, which strengthen intellectual property. The marginal increase in tax and the increase in Dividend Distribution Tax will have some impact on the market sentiments of investors.

VERDICT Glad

Glenn Saldanha
CEO & MD
Glenmark Pharmaceuticals

Given that the pharma industry is one of the growth sectors for the Indian economy and that India is now respecting IPR, which would create challenges for Indian companies in the future, we were hoping there would be significant incentives to stimulate Indian R&D. However while we expected more, we are glad that the R&D 150 percent tax incentive will continue for an additional five years.

VERDICT Pleased

Malvinder Singh
CEO & Managing Director
Ranbaxy Laboratories

I am extremely pleased that the FM has extended the incentive scheme for pharmaceuticals. This will enable vital research work to continue within the country, in a stable environment and will help to deliver a sustainable India advantage in this sunrise sector. Overall the Budget provides impetus for inclusive growth by targeting areas in agriculture, education and healthcare.

VERDICT Good

Dr Swati Piramal,
Director-Strategic Alliances
Nicholas Piramal India Limited

Budget 2007-2008 is a good year for the pharma sector. Weighted deduction under section 35 (2A,B) for 150 percent is continued for next five years for approved in-house R&D facilities of industries in the bio-pharma sector. This is a very positive development for increasing investment of the India's knowledge economy. Reducing service tax on clinical trials, clarification of FBT on free samples, encouragement of venture capital, funding in biotechnology and NCE research are very positive steps. Increased allocation in the healthcare has been a long awaited move. Increased spending on TB, Malaria, HIV and vaccines is also important news.

VERDICT Nice try!

Samprada Singh
Chairman
Alkem Laboratories

We believe that the Budget is aimed at stability and continuity. Well, as the Finance Minister has made an attempt to the above, one would have been happier if certain corporate expectations had been realised. While there was a desire to see FBT being scrapped, on the contrary its scope seems to be getting expanded. Increase in corporate dividend tax comes much unexpected and the repercussions may not be welcome. Service tax has been extended to cover rentals as well and this is probably contradictory to the general expectation of impetus to infrastructure, which is a need of the hour. Overall, the Finance Minister has made a sincere attempt towards continuity of a buoyant economy with an eye on checking inflation.