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Union Budget 2013: Pharma sector expects sweet pill in upcoming Budget

Dr B. Arvind Shah, CEO & MD, Arvind Remedies
In this Budget we expect government to bring down taxes and duties on the life saving drugs and active pharmaceutical ingredients (API) in-turn providing an impetus to growth

Dr B. Arvind Shah

CEO & MD

Arvind Remedies

Dr B. Arvind Shah
Arvind Remedies
 
Recently RBI has reduced its GDP growth forecast for FY13 to 5.5 percent. This clearly indicates a slowdown in the economy which can be attributed to higher interest rates, rising input costs and constrained investments. Pharma sector’s performance in FY13 has been stable. However, we believe that sector has immense potential to grow if in the upcoming Budget government comes out with strong measures to reinstate confidence.
In this Budget we expect government to bring down taxes and duties on the life saving drugs and active pharmaceutical ingredients (API) in-turn providing an impetus to growth. Currently, a weighted tax deduction of 200 percent is available for the R&D expenditure undertaken in an in house facility, we expect this to be increase it to 250-300 percent and also expect it to be extended to expenditure incurred on the external R&D undertaken.
Pricing of pharma products is of key importance to consumers and the companies. Hence in order to make life saving drugs at affordable to people we believe that reduction or abolishing the excise duty will. Apart from this increase in the healthcare Budget will provide the required growth to the industry

Despite Government’s attempts to simplify the tax regime, India still witnesses a complex multi-tier and multi-rate system of transaction taxes levied both by the Federal and State Government.

Puneet Bansal
BMR & Associates

Puneet Bansal, Director, BMR & Associates

Despite Government’s attempts to simplify the tax regime, India still witnesses a complex multi-tier and multi-rate system of transaction taxes levied both by the Federal and State Government.

The already complex structure of transaction taxes becomes more difficult for taxpayers due to frequent changes in legislations both at the Federal and State level.  While many changes are introduced by the Government in Federal taxes in past with a noble intent and are welcomed by the industry at large, disputes often arise at the stage of their implementation.

With the high pace of legislative changes, the Government and taxpayers have, in recent times, seen litigating on a large number of issues due to difference in interpretation.  As a result, significant amount of time, money and efforts get deployed both by taxpayers as well as the Government in long-drawn litigations coupled with retrospective / prospective tax amendments. Above all, it creates uncertainty both for the taxpayers and the Government with regard to tax liability of a transaction and adds to the growing perception that India is a difficult place to do business.

Another reason for the increase in number of tax disputes and litigation is an under-staffed administration, and in some cases, inexperienced in tackling the rapidly changing indirect tax laws and issues arising there under.  This coupled with the fact that the same adjudication authorities simultaneously carry the additional burden of tax collection (to meet the revenue targets set by the Government).

Regularly, we read figures of thousands of crores of Rupees stuck in tax litigations but Government must ponder as to how much of such litigations will actually be decided in its favor. This is evident from a low success rate of Government in tax litigations eventually.

Also, lots of demand notices are issued by the department based on the objections of the audit authorities / CAG without examining the legality of the issue in entirety.

Under this economic scenario, the taxpayers look forward to a few path breaking amendments in Indirect Tax laws that make tax laws certain and reduce the disputes & litigations.

As a first step, the Government can consider widening the scope of Advance Ruling which is presently restricted only to non-residents / Public Sector Companies and that too for proposed transactions.  The scope may be widened to provide an opportunity to the domestic private industry & existing transactions as well to have certainty of taxes by seeking an Advance Ruling on vexed issues.

Also, strict timelines may be introduced for adjudication of notices / appeals by the departmental officers / Courts to reduce the pendency of litigations and to expedite the dispute resolution.

Further, the Government may consider separating the adjudication officers from the jurisdictional field formations. This step may ensure that the show cause notices are adjudicated judiciously thereby lowering the number of cases that enter the main stream litigation.

While the above measures may lead to dispute resolution going forward, the need of this hour is to settle the huge pendency of indirect tax litigations pending at various tax forums. The government may introduce an Alternate Dispute Resolution Panel for decision on pending litigations.

The above measures would go a long way in ensuring that the much sought after reform of the Government in the form of introduction of Goods and Services Tax (GST) could be implemented in true spirits with least burden on the revenue authorities and the tax payers with respect to pending unsettled litigations of the old regime. Also, such an approach will go a long way in reducing the litigations in the upcoming GST regime.

The increasing number of disputes and litigations in the recent past added to the existing pain for the industry already suffering from the hard hit recession.  The industry expects reforms to be brought by the Government in the current budget which would bring down the disputes and litigations in future. However, whether this budget would fulfill such expectations, is a thing to watch out for?

Union Budget 2013: Pharma sector expects sweet pill in upcoming Budget

Recently RBI has reduced its GDP growth forecast for FY13 to 5.5 percent. This clearly indicates a slowdown in the economy which can be attributed to higher interest rates, rising input costs and constrained investments.

India Ratings: Pharma stable on continued growth momentum

 

India Ratings has maintained a stable outlook for the Indian pharmaceutical sector for 2013 as large movements in credit profiles are not likely. The agency expects strong revenue growth from exports, which is likely to offset the negative effect of increased reach of price control in the domestic market.

 

 

Strong exports prospects – led by the rise in generic spending – will drive the sector’s earnings and profitability. India Ratings believes that of all countries that Indian pharma exports to, the US will be the sector’s main focus area in the short to medium term. This is mainly driven by the large size of generic opportunities in the US market on account of patent expiries coupled with pro-generic healthcare policies in the medium term. The strong portfolio of USFDA approved products is likely to help Indian pharma companies succeed in this market.

 

In the domestic market, the recent decision of the National Pharmaceutical Pricing Policy 2011 to increase number of drugs under price control to 348 (from 74 earlier) will negatively impact the companies which focus on the domestic market, especially MNCs while the impact will be lower on the companies which drive significant revenue from exports.

 

Revenue visibility and no significant capacity expansions will drive better use of existing capacities leading to a margin expansion. Asset use (gross fixed assets/ revenue), which had declined to 1.63x in FY11 from about 1.90x in FY08 due to capacity additions, improved to 1.72x in FY12 and is likely to improve further over the next two years as the capacities are increasingly utilised. Operating margins for certain companies will also benefit from higher profits on account of commercialisation of first-to-file opportunities and complex products.

 

However, competitive pressures will continue to have a negative impact on margins and will offset part of the margin benefits. The negative impact of pricing pressures will be lower for the large players that are largely backward integrated than for non-integrated smaller to mid-size companies’.

 

The agency also notes that to maintain growth momentum over a long term, companies are looking at the acquisition route which could result in product portfolio augmentation and or geographic expansion for the acquirer. Acquisitions, if funded through debt, can negatively impact the credit profiles of acquiring companies; turning out profitable operations from acquired assets could also be a challenge.

 

The outlook could be revised to negative on account of player-specific or sectorial regulatory actions culminating in import bans or substantial deterioration in credit profile on account of large debt-financed acquisitions.

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India Ratings-rated pharmaceutical companies include: Aurobindo Pharma  Limited (‘IND AA-’/Stable), Jubilant Life Sciences  Limited (‘IND A+’/Stable) and Strides Arcolab  Limited (‘IND BBB+’/Stable).

 

India Ratings has maintained a stable outlook for the Indian pharmaceutical sector for 2013 as large movements in credit profiles are not likely. The agency expects strong revenue growth from exports, which is likely to offset the negative effect of increased reach of price control in the domestic market.

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