Budget expectations 2025

Joydeep Ghosh, Partner and LSHC Industry Leader, South Asia

Current Environment

The Indian pharmaceutical industry has come a long way from producing a few affordable generic medicines to being the pharmaceutical and vaccine manufacturing hub for the world. India exports pharmaceutical products to over 200 countries, covers 50 percent of Africa and 40 percent generic demand of the United States and supplies 25 percent of the UK’s medicine requirements. As the third-largest global producer of drugs by volume and fourteenth by value, India produces over 60,000 brands across 60 therapeutic categories and more than 500 APIs. With a strong emphasis on biopharmaceuticals and biosimilars, Indian companies have not only made healthcare more accessible globally but have also established themselves as trusted collaborators in improving global healthcare systems.

The Government of India has taken several measures to boost innovation and growth in the sector with increased funding and infrastructure investments, particularly in cell and gene therapies. For instance, the Scheme for Promotion of Research and Innovation in the Pharma MedTech Sector (PRIP) was launched to bolster research and innovation capabilities. This scheme aims to facilitate cutting-edge research in the pharmaceutical and medical technology sectors with a total outlay of INR5,000 crore (about US$604.5 million) approved from 2023–2028. These developments are expected to create a more dynamic and collaborative research environment in India.

Despite this promising growth trajectory and push from the government, crucial levers of change must be addressed to realise its potential over the coming years due to several challenges being faced by the industry, such as lack of sufficient investments towards R&D, the need for advanced testing facilities, intellectual property protection and lack of incentives for industry-wide investment. Considering the above, some key asks and recommendations are captured below:
 

Expectations

Top asks:
Ask #1: Streamline the existing regulatory framework through a “one regulator” approach

• Multiple regulators regulate several licenses and compliances for both pharmaceuticals and the medical devices sector in India. For instance, a drug license is required for each state, separately for each category; a central license is also required for clinical trials and new drug approvals. Similarly, in the case of certain categories of drugs/medical treatments, additional approvals from PESO, the Atomic Energy Regulatory Board, may be required. For Pharma and Medical Devices policies, the nodal agency is the Department of Pharmaceuticals.
  
  
• Due to the multiplicity of regulatory processes and regulators, undertaking operations becomes complex and time-consuming. In addition, the practices adopted by different regulators for licensing and enforcement vary in each state.
  
  
•  Considering the above, the government should consider forming a single regulatory authority each for pharmaceuticals and medical devices with experts from across the sectors on board. This would not only promote ease of doing business through a streamlined regulatory framework but also boost investments in the sector.

Ask #2: Introduction of a policy on refurbished medical devices to streamline its import in India

• The medical device industry is facing challenges pertaining to the timely approval of licenses of refurbished/ pre-owned medical devices for import/sale within the country.
  
  
• This is due to the absence of a clear regulatory framework for refurbished/reused medical equipment in India, which has severely impacted patients in under-served communities. This situation has deprived them of access to cost-effective medical equipment and has also led to significant financial losses for the medical devices industry.
  
  
• To address these challenges, the government could release a new policy on refurbished/reused medical devices with specific provisions that ensure the safety and efficacy of the equipment. Some of the key provisions for consideration include:
  - Requirement for a minimum shelf-life of 5 years for the refurbished equipment for which responsibility lies with the Original Equipment Manufacturer (OEM) or the authorised representative
  
  - Certification of the refurbished medical equipment by a certified Chartered Engineer from a recognised notified body.
  
  - Responsibility for preventive maintenance and servicing by OEM or their authorised representative
  
  - Responsibility for Post Market Surveillance (PMS) and reporting by OEM or their authorised representative
  
  - Regulators approve the refurbished product of the International Medical Device Regulators Forum (IMDRF) management committee (Australia, Brazil, Canada, China, European Union, Japan, Russia, Singapore, South Korea, United Kingdom and the United States of America)
  
  - Undertaking to be given by OEM or their authorised representative for the adherence to the provisions

Ask #3: Offer additional incentives to promote investments in research and development and promote domestic manufacturing of pharmaceutical products in India

• Currently, most government research grants are limited to institutions and academic centres, with few exceptions for private companies. The Department of Pharmaceuticals could introduce similar provisions for research grants, financial incentives and funding support to encourage private Contract Research Organisations (CROs) to participate in early discovery and clinical research in India.

• Additionally, to encourage greater participation by foreign companies in the public procurement process (Public Procurement (Make in India) Order 2017) and to promote increased local value addition/manufacturing in India, the government of India could consider providing preferential treatment to the companies who are participating in the PRIP Scheme and Production Linked Incentive (PLI) Scheme. In addition, the concept of offsets could be introduced while computing the local content. Hence, value addition can be considered on a composite basis.

• This would not only encourage companies to proactively participate in PRIP and PLI with a longer-term vision of enhanced market access but would also provide a much-needed push to the government’s Make in India vision of becoming a global manufacturing hub.

Ask #4: Reform the Intellectual Property Landscape in India by further reducing patent approval timelines

• The government has recognised the need to reduce the pendency time for patent approvals, currently averaging 50 months, which is higher than the global average.
  
  
• By targeting a reduction to approximately 30 months, the government aims to align India’s IP framework more closely with global standards, enhancing its appeal to international pharmaceutical companies.
  
  
• Furthermore, implementing Patent Term Extension (PTE) and Data Exclusivity (DE) provisions is expected to provide additional incentives for pharmaceutical companies to invest in innovative drug development.
   

Direct Tax

Expectation #1: Extension of sunset date for qualifying for concessional tax rate on income of new manufacturing domestic companies

• The Taxation Laws (Amendment) Act, 2019, inter-alia, inserted section 115BAB in the Act to provide that new manufacturing domestic companies set up on or after 1 October 2019 commence manufacturing or production by 31 March 2023 provided that these companies do not avail of any specified incentive or deductions; they may opt to pay tax at a concessional rate of 15 percent.
  
  
• The Finance Act, 2022, extended the time for commencing manufacturing or production to 31 March 2024.
  
  
• Considering that the government promotes companies to “Make in India”, the time limit for commencing manufacturing or production could be further extended to 31 March 2026.

Expectation #2: Modification of sub-section(2)(b) of section 115BAB

• Section 115BAB provides a concessional tax rate of 15 percent to the company engaged in the business of manufacturing or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it.
  
  
• Considering that the government intends to promote research, innovation and development in India, we expect companies involved only in research-related activities to be included for concessional tax rate under section 115BAB and not be restricted to only research in relation to articles/things manufactured or produced by the company.

Expectation #3: Extension of the sunset clause for Section 194LC

• As of 1 July 2023, the concessional tax rate for interest income on borrowings in foreign currency is 5 percent. This has significantly provided a viable and attractive avenue for Indian businesses to raise funds, thus helping India maintain momentum in economic growth over the years.
  
  
• The sunset period could be extended for borrowings by way of loan in foreign currency up to 31 March 2026; this would support the vision of “Make in India”.

Expectation #4: Clarification on product samples and low-brand value items

• Per explanation 1 to section 37, expenditure incurred for any purpose that is an offence or prohibited by any law is not allowable as a deduction. CBDT Circular no. 5 of 2012 (CBDT Circular) requires disallowance of expenditure incurred by pharmaceutical companies (in view of Explanation to section 37(1) of the Act) in providing “freebies” to doctors in violation of the MCI Regulations.
  
  
• Explanation to section 37 of the Act, clarifying that expenditure would be disallowed to the extent it represents a benefit or perquisite and acceptance of which results in violation of any law, rule, regulation and guideline governing conduct, etc., of the recipient.
  
  
• According to CBDT circular no. 18 of 2022 (Question No. 4), section 194R is applicable to free samples. Further, the per person INR20,000 threshold under section 194R is practically too low as some medical samples cost more than INR20,000 per sample.
  
  
• As the distribution of samples is a business practice and required for marketing purposes, the distribution of free product samples (up to a permissible threshold with certain conditions aligning with UCPMP policy along with criteria mentioned therein) be allowed as a deduction under section 37 as well as not be subject to withholding provision under section 194R.
  
  
• As MCI regulations do not provide a penalty for accepting gifts of value below INR1,000, specific brand reminders, as mentioned in UCPMP policy and up to INR1,000 per item given as part of marketing activity, can be allowed as a deduction under section 37.

Expectation #5: Reintroduction of weighted deduction under section 35(2AB)

• For a company engaged in biotechnology or any manufacturing or production business (excluding certain articles), a weighted deduction was allowed on the expenditure incurred on scientific research (other than the cost of any land or building) on an in-house research and development facility as approved by the DSIR.
  
  
• To promote research, innovation and development in India, a weighted deduction for expenditure on R&D could be reintroduced. The reintroduction should also include the service sector and innovation/significant process improvements undertaken during service delivery.
  
  Further, eligibility for the weighted deduction could be extended to companies that have opted for the new tax regime. The new regime entitles companies to a lower tax rate of 25.17 percent, as most companies are covered by this rate.

Expectation #6: Explanation 3(ii) under section 37 to be clarified

• Explanation 3(ii) to section 37 of the Act states that expenditure would be disallowed to the extent it represents a benefit or perquisite given and acceptance of which results in violation of any law, rule, regulation and guideline governing conduct, etc. of the recipient.
  
  
• Term guidelines can create ambiguity with regard to its scope. Therefore, this explanation could be defined and specific in its scope, or there could be a notification specifying the laws, rules, etc., covered within this section.

Indirect Tax

Expectation #1: Eligibility of Input Tax Credit (ITC) availed by the pharmaceutical companies on payments made to medical practitioners

• The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (MCI Regulations) prohibit medical practitioners from accepting payments from pharmaceutical and allied health sector industries. Recently, an amendment under Income tax provisions was made to disallow such expenses incurred by pharmaceutical companies in violation of MCI regulations.
  
  
• The amendments in the MCI regulations, along with the recent corresponding changes in the income tax provisions, have also impacted the eligibility of ITC availed by the pharmaceutical companies for such payments made to medical practitioners
  
  
• The GST authorities are issuing summons to all pharma companies alleging that since the expenses are disallowed as a business expenditure under the Income Tax law, the same is construed to be used for non-business purposes. As a result, ITCs are not allowed under the GST provisions, even though the GST law does not impose any such restrictions.
  
  
• The government can issue clarifications to allow ITC on such eligible business expenditures incurred on medical practitioners, which are essential for the industry at large and help alleviate unnecessary litigations and uncertainties.

Expectation #2: Bring GST rate on APIs at par with the formulations

• Presently, APIs attract a higher GST rate of 18 percent vis-à-vis formulations, which attract a lower rate (12 percent/5 percent), accumulating credit for the pharma industry. Significant expenses on capital goods also add to the accumulation of credit.
  
  
• While GST law refunds accumulated ITC for addressing this issue, the possibility of inordinate delay cannot be ruled out.
  
  
• The government could align the GST rate for APIs with the lower rate for pharma formulations. In other words, the GST rate across the supply chain for the pharma industry can be at the lower rate of 12 percent to effectively address the issue of credit accumulation, impact on working capital and inordinate delays in obtaining refunds.

Expectation #3: ITC reversal on physician samples and expired good

• GST law provides that ITC on goods lost, stolen, destroyed, written off or disposed of by way of gifts or free samples is required to be reversed. A literal interpretation of this provision in the pharma industry leads to adverse consequences, such as in the case of physician samples.
  
  
• Making samples available to physicians is a time-tested and established industry practice; therefore, such transactions should not fall within the ambit of the restriction.
  
  
• Similar is the issue with mandatory destruction of expired drugs/medicines. Since this is a statutory requirement, it does not need to entail any adverse GST consequences in the form of a reversal of ITC.
  
  
• The government may prioritise these issues, providing long-awaited relief to the pharmaceutical industry.

Expectation #4: GST applicability on the post-supply discount offered by the supplier to contracting parties based on financial credit note

• Circular No. 92/11/2019-GST, dated 7 March 2019, was issued relating to the treatment of sales promotion schemes, which provides clarity that financial credit notes can be issued for secondary discounts.
  
  
• Despite the circular, tax authorities are raising concerns stating that any discount offered by the supplier after the supply has been affected can be treated as consideration for any additional activity/promotional campaign to be undertaken by the dealer, and therefore, such post facto payments to be made by the supplier to the distributor, can qualify as a forward supply of services by the dealer/distributor to the supplier and thereby subject to GST.
  
  
• The government can issue a suitable clarification as follows:
  o Post-supply discounts manufacturers provide to distributors through financial credit notes are not qualified as forward supply.
  o Reinforcing the acceptance of financial credit notes for all types of discounts in the supply chain to avoid unnecessary litigation.