Pre-budget 2018 expectations
Healthcare, Life sciences and Oil & Gas
Healthcare funding in India is needed in preventive care, research, health technology and surveillance. Higher funding for universal screening and awareness generation for non-communicable diseases and mental health also needs to be earmarked. With urban population accounting for nearly 40% of India’s population and likely to increase by another 300 million by 2050, the fund allocation for urban healthcare initiatives in India needs to be strengthened.
Challenges/Issues of the Sector
- In 2017-18, allocation to health was only 2.27% of overall Budget and only slightly greater than 1% of the GDP. This is very low compared to government spending on healthcare in other developing countries which is at 7-12% of GDP
- Malnutrition, air pollution, unsafe water, sanitation, and other environmental risks are some leading risk factors. These indicate a strong case for convergent budgeting, planning and implementation. The National Nutrition Mission needs to be provided higher allocation
- Despite introduction of health insurance schemes, overall coverage and penetration is low. Government should focus on expanding insurance coverage for APL, BPL families, increase coverage amount, introduce disease specific insurance schemes and insure high risk NCD patients for costs of preventive checkups, in-patient and out-patient care
- Some positive steps have been undertaken to make healthcare more affordable and equitable such as price controls on medical devices and adjustments to import duty structures on raw materials and equipment. However, granting infrastructure status, providing backward area benefits, tax incentives, subsidies and other incentives are needed to increase investments, especially in tier 3 and rural, backward and remote areas
Expectations from Union Budget 2018
- Under the GST regime, healthcare services should continue to be exempt from taxes
- To make healthcare more affordable, high taxes levied on inputs such as consumables as well as on medical equipment (in the range of 12-18%) need to be reduced
- The government needs to enhance limit of non-taxable medical reimbursement to at least to Rs. 50,000 considering increase in cost of medical expenditure
- Pro-rata deduction of single premium paid in a year should be allowed over the term of the policy
- Deduction on health insurance under section 80D may be enhanced to Rs. 40,000 for individuals and Rs. 50,000 to senior citizens to reflect inflation and increase in cost of living
- Tax exemption on preventive health check-up under section 80D should be raised from current Rs. 5,000 to a maximum of Rs. 20,000
- Weighted deduction available under section 35AD to a taxpayer engaged in building and operating a hospital be restored to 150% (currently 100%) to reduce cost of burden on patients
- Liberalize provisions of section 35AD to include new hospitals with less than 100 beds to be eligible for deduction
- Currently, 100% deduction under section 80IB is available to an undertaking deriving profits from operating and maintaining a hospital in India. The provision may need to be extended and the benefit may also be extended to hospitals situated in areas earlier excluded
- To promote government’s efforts towards ‘Digital India’, 250% deduction on investment made for the implementation of Electronic Health Records and Health IT Systems should be provided
- Weighted deduction may be allowed for healthcare infrastructure expenditure incurred in rural/ semi urban areas
Digital and other technological revolutions need to be harnessed through specific budget allocations to make surveillance, monitoring and implementation of healthcare programmes for a diverse country like India feasible, and to enable India to achieve its potential for productive healthy growth.
Domestic consumption and exports have together contributed to the 15-18% average growth of Indian lifesciences market over the past 15 years; the industry is now at an estimated Rs 190,000 crore. It can grow to over Rs 400,000 crore in the next five years.
The government’s proactive policies have helped domestic private pharma companies build on scale, with Indian generic firms recognized the world over as critical partners to providing safe yet low cost medications globally.
Challenges/Issues For the Sector
- Financial, non-financial incentives will increase Indian companies’ presence in API (active pharmaceutical ingredients) manufacturing
- Revive focus on quality in Indian companies to build global confidence in Indian manufacturing
- Local innovation discouraged due to pressures of price control
- Expand government focus on chronic diseases such as diabetes, cardiovascular ailments. Previous Budget had highlighted chonic kidney disease which led to increased dialysis centers
- Tax incentives to diabetics and those with cardio diseases can reduce overall cost of treatment
- Promote cutting edge R&D to help Indian players make the transition from pure play generic players to branded pharma firms
Expectations from Union Budget 2018
- Concessional tax rates for royalty received from overseas for patents
- Allowing deduction for expenditure incurred on marketing, protection of patents
- Concessional tax for successors of mergers/demergers in slump sales or inheritors of inventions
- Concessional tax rate on royalty be extended to include know-how, copyright, trademark
- Weighted deduction be allowed while calculating MAT liability
- Restoring deductions scheduled for to be phased out soon
- Expenses on scientific research carried outside the purview of DSIR, should also be eligible for deduction
- Expenses in connection with payment to doctors should also be available for deduction.
- Patent Box Regime (Section 115BBF):
The royalty received from overseas for a patent which is registered both in India and in a foreign country should also qualify for concessional rate of tax.
Patents get filed in the early stage of its development and later, further innovation may be required to make it marketable. Also, patents need protection. All these abovementioned activities need incurring of huge expenditure. Hence, deduction for proportionate expenditure be allowed while arriving at the taxable income (currently, income is taxed on gross basis).
The benefit of concessional tax be available to successors in cases like tax neutral mergers and demergers and/or succession by way of slump sale or death of the inventor.
The benefit of concessional rate of tax on income by way of royalty in respect of a patent developed and registered in India be also extended to other intellectual property rights like know-how, copyright, trademark etc.
- Weighted deduction for R&D expenditure under section 35 be allowed while computing MAT tax liability under section 115JB as well.
- The quantum of weighted deduction available under Section 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA) and 35(2AB) will be phased out over a period of time. It may be recommended that the same should be restored back to the deduction available earlier of 125% to 200%.
- The expenditure incurred on scientific research carried outside the DSIR approved in-house R&D facility should also be eligible for deduction under section 35(2AB).
- The expenses in connection with payment to doctors viz. freebies, conferences, seminars, etc. should also be eligible for deduction under section 37(1).
The government’s approach to the pharmaceutical industry has been driven by an interesting mix of pragmatism, coupled with occasional protectionism. This has helped the private sector to create massive scale, especially in formulations. However, the government needs to take measures to ensure that Indian companies maintain their edge, not just in low cost manufacturing, but also in moving up the innovation curve.
Oil & Gas
India is one of the largest energy consumers in the world with an overall share of 5.3% in global energy consumption. According to BP Energy Outlook 2016, India's energy consumption is projected to grow at 4.2% per annum, up to 2035, faster than all major economies in the world. With this fast pace demand and continued dependence on fuel imports to meet its energy demand, ensuring energy security is crucial to sustain the country’s growth momentum.
Challenges/Issues of the Sector
- Significant initiatives undertaken to overhaul energy policy including HELP to replace previous NELP
- Introduction of demand-based bidding under OALP instead of cyclical bidding
- Shift from cost recovery model to progressive revenue sharing model
- Grant of pricing and marketing freedom
- National Data Repository set up to provide investors with access to Exploration and Production seismic data
- Government has approved merger of HPCL into ONGC, as part of previous Budget proposal to create integrated public sector oil major through consolidation to bear higher risks, avail economies of scale, take higher investment decisions and create more value
- Government has embarked on ‘24X7 power for all’ by March 2019, and also set target of 175 GW of renewable energy capacity by 2022, which would require multi-fold growth
Expectations from Union Budget 2018
- Align provisions of Income-tax Act with revenue sharing contract which seeks to allow deduction of expenditure incurred by contractor on exploration, development and production
- Government should rationalise sunset clause to clarify that phasing out of deduction should be with respect to production sharing contracts entered into after April 1, 2017, and not with date of commencement of commercial production
- Government should consider reducing MAT rate for E&P operations. It is currently at about 20% of book profits and is a significant deterrent for overall investment
- Budget should clarify scope of ‘mineral oil’ to include natural gas, eligible for tax holiday
- Amend section 42(1) of Income-tax Act to provide for deduction of expenditure in the year of incurrence without any condition
- Budget should clarify that offshore platforms used for oil exploration /extraction activities be classified as ‘plant and machinery’ for claiming depreciation under the Income-tax Act
- To rationalize tax structure for the sector, petroleum products should be brought under GST to enable free flow of credits and avoid cascading of taxes
- Alternatively, oil and gas sector be allowed refund of GST paid on procurement of goods and services, by way of zero rating supplies to the sector
- It is suggested that levy of IGST on supply of goods from shore base to offshore location should be exempted
- Exempt services used for petroleum operations in line with exemptions provided for identified list of such goods
- Budget should clarify that profit/ cost petroleum, inherent in an E&P, does not qualify as a ‘consideration’ for service
- Exempt LNG imports from customs duty to promote use as fuel for industrial operations
- Exempt power and renewable energy businesses from provisions of section 94B of Income-tax Act on limitation of interest deduction
- Roll out geography-based tax incentives for renewable energy clusters such as solar parks, wind energy farms
- Extend investment-linked deduction under section 35AD of Income-tax Act, to firms engaged in generation and /or distribution and transmission of power, similar to infrastructure projects
- Exempt /rationalize levy of MAT for power generation business
- Introduce weighted deduction for expenditure incurred on energy efficient and carbon emission reduction technologies as such technologies are expensive to implement
- Customs duty on import of power plant equipment for captive power generation should be exempted to improve cost competitiveness of Indian industry
- Duties/cess on captive power generation be subsumed in GST since such levies adversely impact advantages of setting up captive power plants.
- Government should consider exemption of GST on goods/ services rendered to setting up and operation of power plants
- Installation of solar roof top under EPC contract should be considered as supply of ‘solar power generating system’ (taxable at 5 percent) under GST
- Renewable Energy Certificates should be exempt from GST
These issues have slowed investment in the sector and subdued impact of policy initiatives to boost domestic output, shift towards cleaner fuel. It is thus imperative that Budget 2018 recalibrates some of the government’s well-intentioned policy initiatives and resolves legacy tax issues to propel investment momentum.