Contradicting the position of Ministry of Finance of gradually decreasing the tax deductions that is available to pharmaceutical and medical device companies on research and development (R&D) expenses, the Department of Industrial Policy and Promotion (DIPP) has stated that these deductions should be maintained in order to incentivise their R&D activities.

These statements were tabled during the closed door session between Union Chemicals and Fertilisers Minister Ananth Kumar and senior executives of pharmaceutical companies in Bengaluru at ‘India Pharma 2018’ on February 15. During this session, an action taken report — which contained the responses of government departments such as Ministry of Finance, DIPP and Department of Pharmaceuticals (DoP) on various industry proposals — was presented by the pharma industry to the minister for discussion. The DoP works under the Ministry of Chemicals and Fertilisers.

According to the action taken report, the DIPP stated: “200 per cent weighted deductions of R&D expenses should be maintained in order to incentivise R&D activities.” However, it added that the Department of Revenue, which comes under the Ministry of Finance, can “consider taking a view in this regard for providing required incentives under section 35 (2AB) of the Income Tax Act, 1961”. The pharma industry, according to the action taken report, has in fact asked for increasing the weighted deduction from 200 per cent to 250 per cent till 2023-24 so as to “encourage innovation and Make in India to promote Indian manufactured drugs”.

Section 35 (2AB) of the Income Tax Act, 1961, provided an income tax exemption of 200 per cent on any expenditure incurred by a pharma or a medical device company on “scientific research or in-house research and development facility as approved by prescribed authority”, not including any expenditure in the nature of “cost of any land or building”. This deduction was available till 2016-17.

On February 28, 2015, Finance Minister Arun Jaitley in his Budget speech announced that the rate of corporate tax will be reduced from 30 per cent to 25 per cent over the next four years, along with corresponding phasing out of exemptions and deductions, including weighted deductions. “In view of this, weighted deduction under section 35 (2AB) is being phased out by Finance Act, 2016. The deduction shall be at the rate of 150 per cent from 2017-18 to 2019-20, and from 2020-21 and onwards 100 per cent weighted deduction shall be allowed,” the Ministry of Finance stated in its response to the pharma industry, according to the action taken report.

The finance ministry added that for promotion of R&D activities in India, the Income Tax Act, 1961, has already put up a concessional tax regime from 2017-18 towards ‘tax on income on patents’ by introducing a new section 115BBF. “The aim of the concessional taxation regime is to provide an additional incentive for all assesses to retain and commercialise existing patents to develop new innovative patented products,” stated the Ministry of Finance. Section 115BBF provides that where the total income of a company includes any income through royalty earned from a patent developed and registered in India, then such royalty shall be taxable at the rate of 10 per cent on the gross amount of royalty. Additional surcharges and cess have to be paid on top of this 10 per cent.

“In view of the above, it would not be possible to accept the request of continuing the weighted reduction for in-house R&D beyond 2019-20,” the finance ministry told the pharma industry, as per the action taken report.