Drug makers pin hopes on Budget for import duty cut in raw materials; research incentives

New Delhi: Drug makers are pinning hopes on the forthcoming union budget for more tax incentives for research, import tariff reduction on raw materials and easing of procedures for tax refunds.

The Pharmaceuticals Export Promotion Council of India (Pharmexcil), a trade promotion agency set up by the commerce ministry, has sought a reduction in basic customs duty (BCD) on imported raw materials for making antibiotics from 7.5% to 5% and enhanced tax incentive for companies to invest in research.

The agency has pitched for allowing double the amount of research spending made by companies as a deduction while computing their taxable income. Now, 100% deduction of research spending is allowed. Pharmexcil also sought simpler procedures for claiming refund of extra taxes paid on raw materials than on finished products.

“The profit margin on sale of antibiotics is very low. Rising prices of active pharmaceutical ingredients (API, or raw materials) is further impacting the cost competitiveness,” the trade promotion agency said in its recommendations, seen by Mint.

Antibiotics are a key part of drug makers’ product portfolios. They are part of the anti-infectives market segment which also includes antifungal and antiviral drugs.

“The anti-infective segment’s market size stood at about Rs. 251.3 billion for fiscal year 2024. Leading companies in the segment are Sun Pharmaceuticals, Cipla, Alkem Laboratories, Macleods Pharmaceuticals and Aristo Pharmaceuticals,” said a spokesperson for CRISIL Market Intelligence and Analytics.

Decisions on import duty reduction are taken by weighing the interests of different segments of the industry and the overall benefit to the industry. Where domestic producers are there, a reduction in the import duty could reduce the tariff protection available to them.

"While the duty cut on imports of APIs will only be detrimental to the domestic API manufacturers, considering the high dependence of the Indian formulations industry on imports of such key starting materials/APIs, it will help ease the input costs for the formulations manufacturers until the domestic production of such API ramps up," said Kinjal Shah, Senior Vice President and Co-Group Head - Corporate Ratings at ICRA Ltd.

Major importer of raw material

India is a major importer of raw materials and intermediates for drugs and an exporter of finished products. In FY24, bulk drugs and drug intermediates accounted for over 55% of India’s total pharma imports. Formulations and biologicals account for nearly three-fourths of this. 

Pharmaceutical imports grew marginally by 1.98% from $8.10 billion in FY23 to $8.26 billion in FY23.

Indian pharmaceutical exports in FY24 was valued $27.85 billion showing an annual growth of 9.66%.

Top of wishlist

Incentivizing research and hiring talent also figure prominently in the wishlist of drug makers.

"The government's production linked incentive scheme has begun to yield tangible results in bolstering domestic pharmaceutical production, reducing import dependency, attracting talent and increase in investments in the sector. The Promotion of Research and Innovation in the Pharma MedTech Sector (PRIP) signifies a strategic move towards augmenting indigenous R&D. it is essential to retain skilled workforce and introduce robust initiatives that incentivize top scientific talent,” said V.S. Mani, executive director and global chief finance officer at Glenmark Pharmaceuticals Ltd. The PRIP scheme was launched last year to encourage the industry to invest in research and development in priority areas.

“Policies encouraging skilled individuals of Indian origin from around the world to return and contribute to the country's growth will be crucial in nurturing innovation and industry development,” said Mani.

“India is more into conventional generic drugs and last year the country has exported pharma products worth over $ 27.8 billion. If the Indian pharmaceutical industry starts working in the field of research and development, then one needs government support to make it a continuous process and government should explore possibilities to exempt research and innovation from taxation. This is very much needed," said Uday Bhaskar, former DG of Pharmexcil and Honorary Director General of All India Drugs Control Officers‘ Confederation (AIDCOC).

Pharmexcil also proposed that spending on corporate social responsibility out of net profits should be treated as business expenditure and should be allowed as a deduction under the Income tax Act and taxes paid on CSR-related spending should be allowed as credit under GST laws. Pharmexcil has also proposed to GST credit on expired pharmaceutical products should not be reversed.

Gireesh Chandra Prasad contributed to this story.