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Issue of investment allowance, weighted deduction unaddressed in Budget 2018: Experts

Nandita Vijay, Bengaluru
Wednesday, February 7, 2018, 08:00 Hrs  [IST]

Experts in the pharma industry see the tax benefits like investment allowances, weighted deduction among others which have remained unaddressed in the budget 2018. This despite the requests put forth by the pharma sector specifically from a tax perspective.

Vinita Krishnan, Associate Director and Raghav Kumar Bajaj, Senior Associate, Direct Tax, Khaitan & Co. pointed out that a pan-India investment allowance for setting up factories/units to manufacture pharma sector related inputs should have been provided. This would have been in line with the several schemes announced by the government for betterment of the healthcare which would need the support of manufacturing.

The weighted deduction for scientific research related expenditure should have been relooked. It is in line with the motto of having an overall reduced corporate tax rate in mind, although it is the government’s emphasis of pruning out such deductions as a precursor to have a reduced corporate tax rate in future years. But given that scientific research is the most essential tool for the growth and progress of pharma and healthcare sector, one must recognise that this sector needs special care and attention as compared to any other sector, said Bajaj.

Another aspect is clearing the air around weighted deduction for expenditure on the outsourced scientific research. Given that in many instances, for better efficiency and for making use of the specialists, research activity is outsourced. So it would have been ideal to clarify 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 prevent the misuse of such a provision could have been provided in the law itself, he added.

Another ask by the industry was in relation to patent box regime. In order to incentivise inventions and patents, a concessional tax regime for patents developed in India was introduced in 2016. While the intent and object of this beneficial tax regime was to encourage indigenous R&D activities and to make India a global R&D hub is clear, but the language used in 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 develops a patent with its employee, the company cannot be a ‘true and first inventor’. As a result, despite 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 modified to ensure that in cases of joint patentees, the benefit of this regime is extended 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. However, the government’s proposal to reduce the corporate tax rate for companies having turnover upto Rs. 250 crore is likely 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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