Though some tax proposals may negatively impact the pharma
sector, overall, the budget proposals have been received positively
in this sector and will provide a boost to the industry.
Finance Minister, Mr. Arun Jaitley presented the Union Budget in
Parliament on 29 February 2016. While no specific announcements for
the pharma sector were made, below are a few tax proposals that
could have an impact on the pharma sector:
1. A flat corporate income tax rate of 25% has been prescribed
for Indian manufacturing companies formed on or after 1 March 2016.
This proposal will provide a boost to drug manufacturers who may
want to set up new manufacturing facilities.
2. Currently, the Central government provides a weighted tax
deduction of 200% for any capital and revenue expenditure incurred
on account of in-house R&D by a company, excluding expenditure
on land and buildings. Such weighted tax deduction is proposed to
be reduced from the present 200% to 150% from April 2017 to March
2020 and thereafter from April 2020 to 100%. This has led to a huge
disappointment as the industry was expecting a 300% weighted
average reduction. This reduction will have a negative impact for
all pharma companies as it will result in an increase in tax
3. Benefit of section 10AA (applicable to units located in
Special Economic Zones) is proposed to be made available to units,
commencing manufacture or production of articles or things, or
providing services before 1 April 2020. This will benefit pharma
companies that are setting up new manufacturing facilities in
Special Economic Zones.
4. A special patent regime has been proposed wherein global
income by way of royalty from worldwide exploitation of patents
developed and registered in India will be taxed at the rate of 10%
on a gross basis plus surcharge/cess. The income will not be
subject to MAT. This proposal will provide a significant boost to
local innovation and manufacturing since the general tax rate is
around 35%. Consequently, pharma companies which have patents
registered in India would be able to commercialize patents on a
5. Certain changes proposed in the indirect tax regime will
affect the pharma sector as follows:
(a) The effective service tax rate will be increased to 15%.
Krishi Kalyan Cess at the rate of 0.5% will be levied on the value
of all taxable services. This change is likely to have a negative
impact on all pharma companies as the cost of procuring services
(b) Excise and customs duty (Basic Customs Duty, Countervailing
Duty and Special Additional Duty) exemption is proposed to be
granted to disposable sterilized dialyzer and micro barrier of
artificial kidney. Dialysis equipment manufacturers are likely to
benefit from this exemption.
(c) The proposed exemption of service tax on services provided
by biotechnology incubators approved by Biotechnology Industry
Research Assistance Council (BIRAC) is expected to provide an
impetus to start-up biotech enterprises and new units.
(d) Basic Custom Duty exemption is proposed on import of medical
use fission Molybdenum-99 (Mo-99) by the Board of Radiation and
Isotope Technology (BRIT) for use in the
manufacture of radio pharmaceuticals. This benefit is limited to
imports by BRIT and, therefore, private pharma companies will not
be entitled to avail this benefit.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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