Industry wants reinstallation of weighted deduction of 200% on R&D spend.

The pharma industry in the country has done a lot to maintain the country’s export-import balance during the covid-19 pandemic as it saw a mind-bewildering increase in its exports during those years. However, now that the world has hopefully seen the worst of the COVID-19 pandemic, the country’s government must do its bit to help maintain these export levels.

To encourage research and development that may lead to the discovery of new innovative drugs and new alternative raw material sources, the pharmaceutical industry in the country has urged the government of India to reinstate the weighted deduction of 200 percent on the expenditure that is incurred by a player on in-house Research and Development (R&D) facility. That can tremendously reduce dependency on imports, they claim.

Incentivizing Research and Development (R&D) expenditure is required, especially in the pharmaceutical sector if one desires to boost innovation and alternatives in drugs and raw materials, said Indian Drug Manufacturers’ Association (IDMA) in a representation to the Department of Pharmaceuticals (DoP) recently.

The tax reduction demands of Small Manufacturing Enterprises (SMEs) are to the tune of 150 percent on Research and Development (R&D) spend. The government of India should reinstate a weighted deduction to 200 percent on the expenditure incurred on research on in-house R&D facilities to promote pharma Research and Development (R&D), it demanded.

The Finance Act of 2016 has restricted the weighted deduction to only 150 percent of expenditure from the financial year 2017-18 till the financial year 2019-20. This deduction was being phased out. Consequently, from the financial year 2020-21, deduction under section 35 (2 AB) is further restricted to merely 100 percent of the total expenditure incurred.

This phasing out of weighted deduction Research and Development (R&D) incentives will not only discourage the industry player from participating in various initiatives of critical importance like “Make in India,” “e-Governance,” “Clean Energy,” “Digital India,” etc. participation in which is being aggressively sought by the government of the country but will also dampen the spirit of innovation which is critical for the robust growth of the Indian pharma industry. Incidentally, the current trend around the globe is to encourage Research and Development (R&D) activities through the provision of various incentives. Such incentives are already available in the United States, United Kingdom, Australia, Italy, France, China, and Singapore, Indian Drug Manufacturers’ Association (IDMA) claimed.

The present regime of in-house Research and Development (R&D) expenditure is regulated by the Department of Scientific and Industrial Research (DSIR), which approves Research and Development (R&D) expenditure as per some very subjective standards of its own, which are beyond statutory guidelines as prescribed in Rule 6(7A). Department of Scientific and Industrial Research (DSIR) changes its policies without holding any prior consultation with industry and then applies these changes on a retrospective basis to past years’ claims. Such practices are highly unsatisfactory and adversely impact ‘the ease of doing business in the pharma industry. To give one instance, the Department of Scientific and Industrial Research (DSIR) revised its guidelines in 2017, which disqualified expenditure reflected as ‘Capital Work in Progress (CWIP). There was no explanation for the basis of such disqualification. There was also no exception made for genuine Research and Development (R&D) expenditure which may be reflected as ‘Capital Work in Progress (CWIP). For example, machinery acquired in a particular year and then installed in the next year should be shown as ‘Capital Work in Progress (CWIP)in the first year or developmental expenses capitalized in books as per requirements of AS-26), it pointed out.

The research and development expenditure is already low in India, and it is hoped that the government will see justice in demand made by the industry players.