Union Budget: Stimulating pharma and healthcare for Amrit Kaal

The Union Budget 2023-24, the first budget of Amrit Kaal, set out a vision and blueprint for an empowered and inclusive economy to lay building blocks for the coming 25 years in the journey to India@100 in 2047. Some of the priorities adopted therein include ‘inclusive development’, ‘reaching the last mile’, ‘infrastructure & investment’ and ‘unleashing the potential’.

The growth of the Pharma and Healthcare Industry would align perfectly with these broader objectives. Considering this, Budget 2024 is being keenly awaited, for impetus and prominence to this sector.

Policy initiatives and budget allocations

In recent times, the government has announced policy initiatives to promote the growth of this sector. These include:

• Digitisation of health with initiatives like Ayushmaan Bharat Digital Mission, CoWIN (a digital vaccine delivery platform), health registry, telemedicine, etc.
• National Medical Devices Policy, 2023 to facilitate the growth of the medical device sector to meet the public health objectives of access, affordability, quality, and innovation.
• National Policy on Research & Development (‘R&D’) and Innovation in the Pharma-MedTech Sector and the Scheme for Promotion of Research and Innovation in Pharma-MedTech (PRIP), to strengthen the research, development and innovation efforts.

As per the Economic Survey 2022-23, India’s public expenditure on healthcare was approximately 2.1 per cent of GDP in FY23 and 2.2 per cent in FY22, an increase from 6 per cent in FY21. Yet, a lot more can be done to facilitate accessible healthcare in India and to develop India as a global healthcare hub.

Establishing sufficient hospitals / medical centres in smaller towns and rural areas with better diagnostic facilities, structured use of telemedicine and increasing coverage of health insurance can help in making healthcare more affordable and accessible to all. Momentum can be gained by incentivising private sector participation through appropriate policy measures and fiscal incentives. Also, greater allocations in the Budget are critical to reduce the out-of-pocket expenditure of households and to increase the healthcare infrastructure across the nation.

Addressing tax issues about business expenditure

Typically, pharmaceutical and healthcare companies incur various marketing and related costs which involve medical practitioners. Tax deductibility of these expenses has been challenged on the basis that these are incurred in violation of law. Many of these activities are important for the industry. For instance, free product samples familiarize medical practitioners with the product and be confident of its efficacy, some enable companies to get feedback for product / market enhancement. Educational activities keep practitioners abreast of the latest developments in the field; the endeavour being that the ecosystem within which these companies operate keeps pace with medical advancements since most products are for prescription-based use.

Disallowance of these business expenses and related litigation creates difficulty and uncertainty. Also, the recently introduced withholding tax obligations on business benefits and perquisites have added to cost and procedural issues. To streamline this, it is hoped that the government considers resolving the following aspects:

• The Drugs and Cosmetics Rules, 1945 recognises the practice of distributing drugs to medical professionals as free samples and there is no specific prohibition in the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (‘MCI Regulations’). Therefore, free samples up to a permissible threshold to be allowed as deductible expenditure and not be subjected to withholding tax.
• Sponsorship of any third-party educational activity like seminars, workshop, symposia, conference, etc. to be allowed as deduction.
• MCI Regulations do not provide penalty for accepting gifts of value below Rs 1,000. Similarly, such that low value brand reminders given as part of marketing activity to be allowed as deduction.
• Input Tax Credit (‘ITC’) availed by pharmaceutical companies on payment to medical practitioners should be allowed on eligible business expenditure incurred on medical practitioners; presently, GST authorities are questioning ITC claimed on expenses disallowed by income-tax authorities.

Tax incentives for R&D  

Nurturing R&D and innovation is essential for India. Considering that the government intends to promote India as an R&D hub, targeted tax incentives would be important to attract investments in this space:

• Weighted deduction for expenditure on R&D should be reintroduced, such that companies have comprehensive advantage and nudged to focus on innovation and research. Also, the weighted deduction should be extended to companies who have opted for lower tax rate of 22 per cent as most companies now fall in this category.
• Companies involved purely in research-related activities should also be given benefit of lower tax rate of 15 per cent. At present, this benefit is available to companies involved in research in relation to article / thing manufactured by the company.

Other tax incentives

• Weighted deduction for expenditure on upskilling and training, to develop well-trained staff to cater to various aspects of healthcare.
• The income-tax law provides an option of concessional rate of taxation of 15%[1] for new domestic manufacturing companies subject to conditions. For eligibility, the company is inter alia required to commence manufacturing on or before 31 March 2024. To incentivize new investments, the timeline to qualify for the special rate should be suitably extended.
• Interest income on foreign currency borrowings made up to 1 July 2023 is subjected to a concessional tax rate of 5 per cent. To further support make in India, the sunset period for making eligible borrowings should be revived.

With policy measures and tax incentives, the pharma and healthcare industry can grow exponentially and prove to be one of the largest employers and contributors to the Indian economy. It is hoped that Budget 2024 provides stimulus to tap this potential early in the journey to India@100!

Shuchi Ray is Partner, Deloitte Haskins & Sells LLP; Shivali Valecha and Siddhi Maru are also from Deloitte Haskins & Sells LLP. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views.

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