Raise Pharma’s Weighted Deduction for R&D-PHD Chamber

PHD Chamber has urged the Government to consider raising the rate of weighted deduction for research and development (R&D) expenses for the pharma sector from 150 per cent as of now to 200 per cent, in view of the special nature of the industry and the extreme focus that has to be laid on innovation to stay competitive.

“Pharma landscape all over the world is changing with substantial amounts committed to R&D, particularly for molecular research, which is time consuming and often attached with great risks. Pharma companies should be encouraged to invest in R&D by offering attractive tax breaks and other incentives,” says Mr. Sanjay Bhatia, President PHD Chamber.

Mr Bhatia pointed out that the current provision for tax break viz Section 35 (AB) of the Income Tax Act is restrictive in nature and cover only expenditure incidental to R&D carried on at the in-house R& D facility. The scope, therefore, has to be widened so as to encompass within its fold all expenditure incidental to basic research carried out at any outside R& D facility. Also clinical trials, bio-equivalence studies etc that are done outside the R&D facility, in India or abroad should be made eligible for weighted tax deduction.

Creation of a world class research infrastructure is critical to attract major global companies to outsource increasingly their R&D works to India, taking advantage of the large pool of technical manpower of the country. One major handicap being faced by such companies, which inhibited their large-scale exposure in India in R&D is the lack of world-class research facilities like the state-of-the art labs and research centers. Private sector investment can considerably increase in this segment, if they can avail of weighted tax breaks and other facilities, assured over a long period of time. Such labs-which also can be termed as incubation centers- can be made use of by small and medium enterprises in conducting research or outsourcing their works at a considerably lesser cost.

A related issue is the provisions for granting 100 per cent deduction under section 80 IB (8A) in respect of the profit earned by any company having the main object of scientific and industrial research and development and approved by the prescribed authority prior to 31st March 2007.This provision has served a laudable cause. However, the Finance Act, 2007 did not extend the time limit for approval in this regard beyond 31st March 2007. It is suggested that the same be extended upto 31st March 2012.

The Chamber also suggested that expenditure for obtaining approval from any regulatory authority and on filing application for a patent outside India should also be considered for weighted deduction. “In the coming years, many Indian companies, particularly in the pharma sector, are going to file applications for patents and trade marks across the world as required under the WIPO regulations. That entails huge cost and many companies particularly the SMEs shy away from filing such applications in view of the cost. Attractive tax breaks on such expenses would encourage more and more companies to go for patent registration in different countries,” says Mr Bhatia.

The PHD Chamber also pitched for abolition of withholding tax incidental on testing charges incurred by Indian research companies payable to overseas research outfits for clinical trials, bio-equivalence studies etc. The New Drug Discovery Research cannot be undertaken unless the drug is tested in animals such as dogs, rabbits etc and human volunteers to ensure toxicity/safety and efficacy of the drugs. Such testing has to be done in Government approved labs, which comply with the standards laid down by the regulatory authority. Often such testing is done in overseas labs due to restrictions on carrying out tests on certain animals in India. Further, the Food and Drug Control Authorities (FDA’s) of developed countries like US-FDA, Canadian-TPDA, UK-MHRA prefer such testing be done on local volunteers /patients. The flip side is that payments made for testing is treated as fee for technical services and not as business income, like in most of the other countries, which does not attract withholding tax. Also most of the organizations conducting the research in overseas labs or universities, are exempted from paying withholding tax. The Indian companies, therefore, has to gross up the charges and have to absorb the impact of the withholding tax.