Impact of Budget 2015 on Pharmaceuticals sector

PharmaceuticalsPost-budget sectoral point of view

Union Budget 2015Inspiring confidence,

empowering change in India

Table of contents

1. Context

2. Key policies/fiscal and tax proposals

3. Unfinished agenda

© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3

Context

Where are we The Indian pharmaceutical sector has come a long way. From being primarily a generics manufacturer to supplying complex formulations to global pharmaceutical markets, the sector has witnessed a significant evolution over the last few decades. Moreover, the sector has shown consistent performance despite the global economic slowdown. The Indian pharmaceutical market is estimated to be INR1,584 billion as on November 2014 and expected to grow at 12-15 per cent.1 The new government’s ‘Make in India’ campaign is further expected to propel domestic pharmaceutical manufacturing, moving a step closer to India’s vision of being a global manufacturing hub.

However, despite all these advancements, the Indian pharmaceuticals industry finds itself surrounded with certain issues that are holding it back from its tryst with double-digit growth and innovation. Certain challenges like ambiguities around the FDI policy continue to malign the sector attractiveness. Moreover, certain instances of quality issues raised during USFDA inspections have impacted the image of Indian branded medicines. Increased competition from China and viability issues further add to the woes of Indian bulk drug manufacturers. The new pricing policy, which has led to margin erosions, has rendered the industry players into a very difficult situation that needs a quick resolution.

Key issues/challenges• The multiplicity of regulatory bodies in the sector for decision making is perceived to have adverse

impacts on effectiveness of policy formation and implementation

• India potentially faces a risk of shortage of essential medicines due to the overdependence on Chinese Active Pharmaceutical ingredients (API) imports, urging the sector to reconsider its API strategy

• In recent times, the Indian pharmaceutical companies have been facing increasing flak from USFDA and other regulators over suspected violation of good manufacturing practices

• Low investments in R&D, unpredictable and unstable price controls, ambiguity around enforcement of IPR laws, inconsistent and time consuming approval processes for drugs as well as clinical trials need quick resolution.

What was expected from the budget• The government needs to provide a clear roadmap to implement the long awaited GST. It is not meant

to be a tax change but a business change which is likely to impact every aspect of business

• Revival of the Indian API industry by investments in clusters, common facilities and introduction of incentives to provide an impetus to the local manufacturing of bulk drugs

• Increasing the percentage of weighted deductions for R&D and provision for weighted deductions for expenditure incurred outside R&D (expenses related to overseas clinical trials, product approval expenses, patenting) under Section 35 (2AB) of the Income Tax Act2

• Exemption and extension of paying Minimum Alternative Tax (MAT) for Pharma and Biotech SEZs to accommodate regulatory gestation of two to five years

• Incentivising the channelisation of funds towards R&D, creating an of innovation fund to reinvigorate India’s evolution to an innovation-based economy

• Reinstating exemption for clinical trials of newly developed drugs on human participants to augment discovery of new drugs

• Incentives and grants for hiring trainees to bridge skill gap in this sector

• Government needs to clarify the nature of expenses which can be considered as ‘unethical’, thereby, inadmissible under Section 37(1) of the Income Tax Act2

• Central excise duty structure on inputs and outputs need to be rectified or should introduce a refund mechanism to avail refund of excess CENVAT credit in case of such an inverted duty structure3

• Single consultative platform, unified ministry for policy making, strengthening and capacity building of regulatory and IP offices

• Financial assistance to SMEs for technology upgradation to meet quality standards in manufacturing.

1. IMS MAT Nov. 2014, BMI report accessed on Nov. 2014, KPMG in India analysis;

2. INCOME TAX ACT, 1961 –Directorate of Income Tax, assessed March 2015;

3. Detailed Pre-Budget Memorandum on Indirect Taxes for 2015-16, Indo-American Chamber of Commerce, Page 13



Key policies/fiscal and tax proposals

Key announcements1

• Three new National Institute of Pharmaceuticals Education and Research (NIPER) in Maharashtra, Rajasthan and Chhattisgarh and one Institute of Science Education and Research (IISER) is to be set up in Nagaland and Orissa each

• SETU (Self-Employment and Talent Utilisation) to be established as a techno-financial, incubation and facilitation programme to support all aspects of a start-up business. INR10 billion to be set aside as initial amount in NITI

• Atal Innovation Mission (AIM) to be established in NITI to provide an Innovation Promotion Platform involving academicians, and drawing upon national and international experiences to foster a culture of innovation, research and development. A sum of INR1.5 billion will be earmarked

• The threshold limit for applicability of transfer pricing regulations to specified domestic transactions increased from INR0.05 billion to INR0.2 billion

• Committed to implement GST, a leading indirect tax system from 1 April 2016

• Effective service-tax rate increased from 12.36 to 14 per cent by subsuming Education Cess and Secondary Higher Education Cess into service tax to facilitate transition to GST

• Time limit for taking CENVAT credit on inputs and input services increased from six months to one year

• Services provided by the common effluent treatment plant operator to be exempted from service-tax

• Service-tax exemption for the transport of goods for export by road from factory to land customs station

• Rate of income tax on royalty and fees for technical services reduced from 25 to 10 per cent to facilitate technology inflow and to avoid the problems faced by small entities

• The corporate tax rate is proposed to be reduced from 30 to 25 per cent over the next four years, starting from the next financial year

• GAAR provisions have been deferred till 31 March 2017. Further, investments made upto 31 March 2017 are proposed to be protected from applicability of GAAR.

Tax reforms and its implicationsDirect Tax1

In the view of providing transformative measures through direct tax, various measures have been proposed such as:

• The corporate tax rate is proposed to be reduced from 30 to 25 per cent over the next four years, starting from the next financial year

• GAAR provisions have been deferred till 31 March 2017. Further, investments made up to 31 March 2017 are proposed to be protected from applicability of GAAR

• Rate of income-tax on royalty and fees for technical services reduced from 25 to 10 per cent to facilitate technology inflow and to avoid problems faced by small entities

• Tax Incentives for the states of Andhra Pradesh and Telangana to encourage industrialisation in notified backward areas.

The proposed reduction in corporate tax is expected to lead to higher investments, higher growth and job creation. Reduction in the rate of income tax on royalty and fees for technical services is likely to have a positive impact on various technology transfers happening in the life sciences sector. This may also motivate aspiring entrepreneurs to transfer technologies in the sector.

1. Key Features of Budget 2015-2016, Ministry of Finance, accessed March 2015



The manufacturing units set up in the notified backward areas of Andhra Pradesh or Telangana on or after 1 April 2015 will be eligible for an additional investment allowance (at15 per cent) and an additional depreciation (at 15 per cent) will be granted to new manufacturing units that set up during the period between1 April 2015 to 31 March 2020. This is expected to encourage the pharmaceutical industry to set up manufacturing units in these area.

Indirect Tax2

With a view to continue its policy on 'Minimum Government and Maximum Governance' and 'Make in India‘, various measures have been proposed through indirect taxes, such as:

• Education cess and secondary and higher education cess have been abolished, thus the general excise duty rate for pharmaceutical goods shall be 6 per cent

• Further, effective excise duty rate has been increased to 12.5 per cent

• Online time bound registrations

• Digitally signed invoices, maintenance of electronic records

• Time limit for taking CENVAT credit on inputs and input services have been increased from six months to one year, effective 1 March 2015

• Penalty provisions have been rationalised with an objective to reduce litigation

• Services provided by the common effluent treatment plant operator to be exempted from service-tax

• Service-tax exemption for the transport of goods for export by road from factory to land customs station.

In addition to the specific changes mentioned above, there are other changes which is expected to impact the industry in general:

• General effective customs duty rate has been increased marginally from 28.85 to 29.44 per cent

• Effective service tax rate has been increased from 12.36 to 14 per cent by subsuming education cessand secondary higher education cess into service tax (from the effective date to be notified)

• Proposal to levy 2 per cent Swachh Bharat cess on the value of taxable services at a later date

• Definition of ‘Consideration’ proposed to be amended to include all reimbursable expenditure or cost incurred and charged by the service provider for levy of service tax

• Advance ruling facility extended to the resident firm (limited liability partnership, limited liability partnership which has no company as its partner, sole proprietorship, One Person Company).

The changes proposed in the CENVAT credit rules can be beneficial for a company as it would reduce certain procedural compliances and would also create additional benefits. Further, the rate increase in service tax is a step towards GST, though it shall have certain impact on financials in the short-term as full credit is not available.

Online time bound registrations, digitally signed invoices, maintenance of electronic records are likely to simplify tax procedures and add to the ease of doing business.

Transfer pricing The threshold limit for applicability of transfer pricing regulations to specified domestic transactions increased from INR0.05 billion to INR0.2 billion. This is expected to reduce compliance burden on the assesse and administrative burden on the department.




ImpactThe Union Budget 2015 left much to be desired with regards to the pharmaceutical sector. A few encouragements in the form of government support to address the skill development issues, entrepreneurship development and emphasis on ease of doing in India, were offered. The Union Budget clearly failed to address the growing pharmaceuticals and biotech sector concerns around cluster developments, incentives for the API industry, concessions related to taxation and the issues directly related to the pharmaceutical sector were not addressed.

Did it meet expectations/did not meet expectations• Establishment of educational institutes in the sector will play an important role in strengthening the

pharmaceutical sector capabilities by enhancing the skills and employability of manpower

• Atal Innovation Mission would go a long way in knowledge sharing by drawing upon national and international experiences from the pool of academics, researchers, etc. This could be a step forward in fostering a culture of innovation, R&D and scientific research in the country. However, clarity around the funds available for the pharmaceutical/life sciences innovations is required

• Setting up of SETU is expected for pharmaceuticals to support all aspects of a start-up business in terms of the availability of funds, incubation and facilitation. Ambiguity around allocation of INR10 billion to different sectors is not addressed.

• Reduction of rate of income tax rate on royalty and fees for technical services is likely to boost technology transfers in the life sciences sector

• However, as a major cause of concern, revival of the API industry to become self-sufficient in the manufacture of essential APIs and intermediaries and reduce dependence on imports was not addressed in the budget. Clinical trials industry, which is already under immense pressure, was also not offered any incentive by the government in the form of any incentive

• The changes proposed in the CENVAT Credit Rules are beneficial for a company as it would reduce certain procedural compliances and would also create additional benefits.

• Further, the rate increase in Service tax is a step towards GST, though it shall have an impact on financials in the short-term as full credit is not available.

SummarySuccinctly, with no major announcements for the sector, the industry players still remain far from being satisfied as the budget failed to give the sector its due attention, yet again. Any mention of the issues related to the pharmaceutical sector specifically, was missing, leaving demands and anxieties of the industry stakeholders unanswered. The budget failed to provide any specific impetus to the sector.




Unfinished agenda

What remains • Revitalisation and capacity building of the Indian API industry, which faces stiff competition from

China, has not been touched upon in the budget

• The much needed focus on cluster development and government support in the form of policy reforms to bridge the infrastructure constraint was missing

• The industry expectation of reinstating exemption for clinical trials of newly developed drugs on human participants was not catered to by the Finance Minister

• The Indian pharmaceutical sector is primarily fuelled by exports. However, no fiscal incentives were announced in the budget to support the exports of the products

• Although the establishment of Atal Innovation Mission to boost the level of R&D and innovation in the sector is a welcome step, it might not be sufficient enough to address the huge gaps in R&D that the sector faces today

• Provisions to reform inverted duty structure to help domestic bulk drug industry grow

• Clinical trial/research and development services provided to recipients outside India would continue to be taxable and not be qualified as exports limiting the growth of the sector.

What is expected going forwardIn view of the government’s long-term vision of ensuring universal access to healthcare and 'Health for all', it is of utmost importance that the government lays equal focus on the pharmaceutical sector.

While the Government of India has declared year '2015 as Year of Active Pharmaceutical Ingredients', it is imperative that the industry becomes self-reliant in terms of manufacture of APIs and other intermediaries. Impetus to the API industry is expected to be announced through the Bulk Drug Policy.

Investments in R&D and innovation are an integral part of its growth trajectory and the sector should focus on placing itself on the global map of innovator countries.

Exports form a major revenue for the industry. In this regard, policy reforms in the direction of incentivising trade and propelling growth of exports would be beneficial.

India was known as the hub of clinical research in the past. However, stringent policy reforms and lack of financial incentives led to the dwindling of the industry. Robust reforms and formation of strategy is required to revive the image of the country in this aspect.

The industry has a huge potential to be a global pharmaceuticals manufacturing hub. For this, an aggressive brand building exercise to reclaim its credibility and a clear roadmap to convert this dream into a reality would be required.

The information contained herein is of a general nature and is not intended to address the circumstances

of any particular individual or entity. Although we endeavour to provide accurate and timely information,

there can be no guarantee that such information is accurate as of the date it is received or that it will

continue to be accurate in the future. No one should act on such information without appropriate

professional advice after a thorough examination of the particular situation.

© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All

rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of

KPMG International.

Printed in India (BRA0115_043)

KPMG in India Contacts:

Nitin Atroley

Partner and Head

Sales and Markets

T: +91 124 307 4887

E: [email protected]

Utkarsh Palnitkar

Partner and Head

Advisory and Life Sciences Sector

T: +91 22 3090 2320

E: [email protected]

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