Budget 2004: Pharma
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All drugs and materials used in clinical trails to enjoy customs and excise duty exemption. |
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The list of life saving drugs that enjoys tax exemptions or concessional tax rates of 5% to be expanded. |
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Customs duty on Glucometers and Glucomteric strips reduced to 5% from existing 10%. |
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The government has proposed a health insurance scheme. As per this insurance plan, an individual will get a cover of Rs 30,000 in case of hospitalization for a premium of just Rs 365 a year. The government aims to bring 5 m families who are below the poverty under the coverage of this scheme. |
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Concessions under the section 10 (23G) to be granted to institutions lending to hospital with more than 100 beds. |
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Depreciation rate on life saving medical instruments increased from 25% to 40%. |
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The impact of budget measure is likely to be very limited on the pharma companies. However, those like Ranbaxy and Dr. Reddy's that are focusing on research and development outsourcing are likely to benefit in the long run. The Indian industry is hoping to cash in on the need to outsource certain activities like clinical trials to cheaper destination. As per one estimate, clinical trails in India cost one tenth of what they cost in the US. Thus, the budget measures will act as an incentive by making the trails even cheaper on account on account of tax exemptions. |
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The effort on part of the Government has been to create a structural support for the development of the health care sector in the country. Both the announcements, launching of the insurance plan and incentive on lending to hospitals are with a view to support the development of the required infrastructure. While the insurance plan will help create incremental demand as more and more people can pay for health services, the incentives to lending institutions will help in creating the requisite infrastructure for the demand.
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The Chelliah Committee had recommended a long-term fiscal policy for this sector according to which the duty applicable should be a graded one i.e. different rates for raw materials, intermediates, bulk drugs (API) and finished dosage forms. This would promote indigenous production. However the current duty structure is inconsistent with the aim of promoting indigenous production. Therefore, the industry expects a customs duty differential to be introduced. |
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To aid bio-tech research and diagnosis, the industry has asked the customs duties for reagents that are used in HIV/AIDS monitoring, cancer diagnosis and life science research to be reduced from 30% to 15%. |
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The industry has also requested for anomalies in customs duty exemption to be corrected. Imports of Erythropoeitin are taxed at a concessional rate of 15% by the customs. However, since this medicine is now being manufactured indigenously in sufficient quantity, the industry has asked the concession to be removed. On the other hand, concessions have been requested for chickenpox vaccine that is not manufactured in India. Considering the life saving nature of the drug it needs to be included in the exempted list. Immunisation vaccines like Hepatitis A, Hepatitis B and Polio should also be fully exempted from customs duty. |
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The list of bulk drugs that enjoy exemption from excise duties needs to be expanded from the current size of 22 drugs. Few more bulk drugs and their formulations, which are used in the treatment of life threatening diseases such as HIV, AIDs and Cancer need to be added in this list. |
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Tax breaks on equipment used for R&D purposes are not admissible when the research is carried out independently in a premise outside the factory of production. The industry wants the tax breaks to be extended even if the research centre is outside the factory premises. |
| Budget 2000-01 |
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Budget 2001-02 |
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Budget 2002-03 |
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| Phasing out of exemption for export earnings over a period of five years. In the current year 20% of the earnings were brought under the direct tax net.
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The Finance Minister announced a 'significant reduction in the span of control' of the DPCO.
The 150% exemption that is available on the R & D expenditure would now include the costs of filing a patent, the cost of clinical trials and the cost of bio-studies.
The budget has also hiked the allocation for the health and family welfare ministry from Rs 49.2 bn to Rs 57.8 bn for the year 2001-2002. Of this Rs 1.8 bn would be allocated to combat AIDS.
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Anti AIDS drugs to be fully exempt from excise duty.
Specific drugs used for treatment of Cancer and other critical diseases would be exempt from custom duty. Incentives earlier given on such drugs, which are now manufactured indigenously, have been charged 5% customs duty.
Customs duty on Glucometers used for diabetes reduced from 25% to 10%.
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| [Read more on Budget 2000-01] |
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[Read more on Budget 2001-02] |
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[Read more on Budget 2002-03] |
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| Key Positives |
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Exports thrust - The revenue model adopted by these companies is perhaps the boldest in the Indian industry. These companies are following a two-pronged approach. First approach is weaved around looking for an opportunity to tap an existing patent viz. challenge the patent of existing products or wait for the patent to expire and then launch the generic version to tap US market. The second revenue stream is an even bolder one. These companies plan to offer research and development (R&D) services to global majors or carry out work on their own. |
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Cost Competitiveness - A new concept that is gaining momentum in the pharma industry is contract research apart from contract manufacturing. Given the low cost high quality advantages, Indian companies are poised to benefit from contract research business on behalf of multinationals. As for contract manufacturing, large global pharmaceutical companies are finding it profitable to outsource production. To cash on these opportunities many large production houses in the country are becoming US FDA compliant. |
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Structural changes - The penetration of health insurance is abysmally low in the country. The entry of private players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. These would finally lead to overall increase in per capita usage of drugs. |
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New growth opportunities - Inspite of the price war, the domestic pharma industry continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segment. Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at reasonable price have been responsible for growth in the chronic/lifestyle segment. This trend is also likely to continue. |
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| Key Negatives |
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Lower end of value chain - The Indian industry lacks facilities and resources to develop a molecule, conduct trials and then launch the product. Indian companies will thus have to depend on their international peers to undertake the more expensive clinical trials and product launches. |
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Weakness in domestic markets - The domestic industry recorded a 9% growth rate, falling short of historic double-digit growth rates. The primary reason for the same is due to the fact that domestic market is witnessing significant price erosion on the back of fierce competition. The Indian markets have traditionally been and continue to remain price sensitive and premium pricing of product is extremely difficult to maintain. |
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Stumbling blocks - In the recent past pharma majors have seen patent challenges being rejected by FDA and have suffered significant set backs on the R&D front. This causes sentiment towards the companies to turn negative. |
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Sharp swings in revenues - Due to successes on the generics front or one time licensing fees, the pharma companies register windfall gains. This has led to volatility in earnings and visibility is impacted. |
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Fierce competition - Intense competition and rapid product launches are the hallmark of the domestic pharmaceutical industry. While there has been volume growth, price erosions have been dramatic. The anti-infective segment has been the worst victim of this price war and this situation is likely to continue for some time to come. |
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