Budget 2018: Issue of Investment Allowance, Weighted Deduction Unaddressed In the Pharma Industry

Experts in the pharma industry view the tax benefits like investment allowances, weighted deduction among others which have stayed unaddressed in the budget 2018. This in spite of the requests put forth by the pharma sector particularly from a tax perspective.

Vinita Krishnan, Associate Director and Raghav Kumar Bajaj, Senior Associate, Direct Tax, Khaitan, and Co. pointed out that a pan-India investment allowance for creating factories/units to manufacture pharma sector related inputs should have been given.

Pharma Industry

This would have been in line with the several plans declared by the government for improvement of the healthcare which would need the help of manufacturing. The weighted deduction for scientific study related expenditure should have been noticed.

It is in line with the motto of having a general decreased corporate tax rate in mind, despite the fact that it is the government’s emphasis of pruning out such findings as a precursor to having a reduced corporate tax rate in future years.

But given that scientific research is the essential tool for the growth and progress of pharma and healthcare sector, one must recognize that this sector needs special care and attention when compared with any other sector, said Bajaj. Another aspect is clearing the air over weighted deduction for expenditure on the outsourced scientific research.

Given that in many occurrences, for better effectiveness and for making use of the experts, research activity is outsourced. So it would have been ideal to clear up that the weighted deduction expenditure in relation to scientific research would be available even for outsourced scientific research. As a balancing act, suitable safeguards to keep the misuse of such a provision could have been given in the law itself, he included.

Another request by the industry was in relation to patent box regime. In order to incentivize inventions and patents, a concessional tax regime for licenses patents in India was introduced in 2016. While the intent and object of this beneficial tax regime were to encourage indigenous R&D activities and to make India a global R&D hub is clear, but the language used as a part of the statute book does not appear to be in sync.

Currently, the benefit of patent box regime is restricted to ‘true and first inventor of the invention’ even in case of joint patentees, said Krishnan. Under the Patent laws, where a company incurs expenditure and builds up a patent with its employee, the company can’t be a ‘true and first inventor’.

Therefore, regardless of having incurred the development expenses in relation to the patent, the company may not be able to claim the benefit of this provision. Here the industry hoped that the language would be modified to ensure that in instances of joint patentees, the advantage of this regime is extended out to the assignee of the true and first inventor, said Bajaj.

Therefore the Budget 2018 which brought benefits to the healthcare should not have ignored the right tax policies for the pharmaceutical industry. Notwithstanding, the government’s proposition to decrease the corporate tax rate for companies having turnover up to Rs. 250 crore is probably going to cover 99% of the companies which file income-tax returns is laudable.

This concessional tax rate should give a much-needed sigh of relief for the pharma sector, said Krishnan.


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