The Pharmaceutical and healthcare industry said it was disappointed with the Budget as it did not have any significant proposals for the sector
Healthcare services
Healthcare services to get costlier due to hike in service tax rate from 10% to 12%
Exemption up to Rs5000 spent on preventive checkup, within limit of Rs15000 outlined under section 80D of IT Act.
Comment: While the tax exemption on preventive check ups would lead to stronger demand for healthcare services and help increased inflows of patients/non-patients to healthcare service centers, higher service tax would partially take away the benefits.
Healthcare infrastructure
Higher allocation of funds under NRHM program will help build rural infrastructure like hospitals and training centers etc.
Comment: This was expected and we do not see any surprise elements in this provisions. Higher spend on healthcare infrastructure in rural areas is set to create sustained demand for pharma products and medical services.
Tax on dividend received from foreign subsidiaries:
Tax on gross dividend received from foreign companies is subject to consessional rate of tax at 15%. This provision has been extended for one more year.
Comment: This is just an extension of existing proposal. Most of front line pharma players would continue to get benefits of these provisions for one more years. As there has been no change in basic corporate tax structure, overall impact from direct tax front would be neutral for pharma companies, except in few cases explained below.
Alternate minimum tax (AMT) on partnerships/other form of organization
It is proposed to provide that a person other than a company, who has claimed deduction under any section (other than section 80P) included in Chapter VI-A or under section 10AA, shall be liable to pay AMT.
Comment: The proposal will have big impact on select Pharma companies, which so by-passed the provisions of MAT on SEZ units by forming partnerships to control undertakings in tax free zones like Sikkim, Baddi etc. The impact would be substantial for Pharma");'> Sun Pharma, which has 97% stake in partnership firm controlling its Sikkim units. Sikkim unit contributed near 60% of consolidated profits for Pharma");'> Sun Pharma. Cadila Health which has 96.5% stake in partnership firm controlling Sikkim units would be second worst impacted with 58% of profits coming from this unit. Pharma");'> Torrent Pharma commissioned its Sikkim units in FY2011 which is under partnerships. Although, profit break up is not disclosed, we may expect sizeable profits from this unit (going by its investments of Rs121 crore in this unit).
Increase in basic excise duty
Basic excise duty has been increased from 10% to 12% for non-petroleum products other than exempted goods and goods attracting merit rate. Duty on products having 5% excise duty currently (like drug formulations) would be subject to 6% duty now.
Comment: The increase in excise duty would make the drugs costlier. Although, the impact would be passed onto consumer, price-controlled drugs will face steeper margin pressure (unless suitable changes are made in price list of controlled drugs by government). There have been no words on industry’s demand to increase the abatements rate from 35% to 40-45% to arrive at taxable amount.
Waiver/reduction of customs duty on medical equipment:
A concessional import duty of 2.5% basic customs duty with 6% CVD and Nil for specified raw materials for the manufacture of syringes, needles, catheters est. subject to actual user condition and components of gloco-meters. Moreover, nil customs duty for steel tube & wire, cobalt chromium tube used for stents are also provided.
Comment: Although, the reduction in import duty may put competitive pressure on local players which are higher fragmented, it is set to benefit company like Opto circuits. Opto Circuits will get benefit of cheaper raw material imported from outside India and also import of finished products from its subsidiaries out side India.
Consessional import duty specified products used by health industry:
Basic customs duty reduced from 5% to 2.5% on Iodine, from 15%/30% on Soya protein/Soya protein concentrate to 10%, from 10% to 5% on probiotics.
Comment: The reduction in import duty is positive for local players. Most of these products are used in food supplements and other nutritional products. It would help local players to compete with MNCs which commands substantial market share.
Net Impact of Budget: We view net impact of Budget as negative in view of increased tax burden on few players and increased excise duty. However, extention of wighted deduction for R&D expenditure for 5 years is a positive for Pharma industry. Besides, reduction in customs duty on raw materil used in medical devices/monitoring systems would not only help local manufacture but also to healthcare industry and infrastructure.
....more info
Healthcare services
Healthcare services to get costlier due to hike in service tax rate from 10% to 12%
Exemption up to Rs5000 spent on preventive checkup, within limit of Rs15000 outlined under section 80D of IT Act.
Comment: While the tax exemption on preventive check ups would lead to stronger demand for healthcare services and help increased inflows of patients/non-patients to healthcare service centers, higher service tax would partially take away the benefits.
Healthcare infrastructure
Higher allocation of funds under NRHM program will help build rural infrastructure like hospitals and training centers etc.
Comment: This was expected and we do not see any surprise elements in this provisions. Higher spend on healthcare infrastructure in rural areas is set to create sustained demand for pharma products and medical services.
Tax on dividend received from foreign subsidiaries:
Tax on gross dividend received from foreign companies is subject to consessional rate of tax at 15%. This provision has been extended for one more year.
Comment: This is just an extension of existing proposal. Most of front line pharma players would continue to get benefits of these provisions for one more years. As there has been no change in basic corporate tax structure, overall impact from direct tax front would be neutral for pharma companies, except in few cases explained below.
Alternate minimum tax (AMT) on partnerships/other form of organization
It is proposed to provide that a person other than a company, who has claimed deduction under any section (other than section 80P) included in Chapter VI-A or under section 10AA, shall be liable to pay AMT.
Comment: The proposal will have big impact on select Pharma companies, which so by-passed the provisions of MAT on SEZ units by forming partnerships to control undertakings in tax free zones like Sikkim, Baddi etc. The impact would be substantial for Pharma");'> Sun Pharma, which has 97% stake in partnership firm controlling its Sikkim units. Sikkim unit contributed near 60% of consolidated profits for Pharma");'> Sun Pharma. Cadila Health which has 96.5% stake in partnership firm controlling Sikkim units would be second worst impacted with 58% of profits coming from this unit. Pharma");'> Torrent Pharma commissioned its Sikkim units in FY2011 which is under partnerships. Although, profit break up is not disclosed, we may expect sizeable profits from this unit (going by its investments of Rs121 crore in this unit).
Increase in basic excise duty
Basic excise duty has been increased from 10% to 12% for non-petroleum products other than exempted goods and goods attracting merit rate. Duty on products having 5% excise duty currently (like drug formulations) would be subject to 6% duty now.
Comment: The increase in excise duty would make the drugs costlier. Although, the impact would be passed onto consumer, price-controlled drugs will face steeper margin pressure (unless suitable changes are made in price list of controlled drugs by government). There have been no words on industry’s demand to increase the abatements rate from 35% to 40-45% to arrive at taxable amount.
Waiver/reduction of customs duty on medical equipment:
A concessional import duty of 2.5% basic customs duty with 6% CVD and Nil for specified raw materials for the manufacture of syringes, needles, catheters est. subject to actual user condition and components of gloco-meters. Moreover, nil customs duty for steel tube & wire, cobalt chromium tube used for stents are also provided.
Comment: Although, the reduction in import duty may put competitive pressure on local players which are higher fragmented, it is set to benefit company like Opto circuits. Opto Circuits will get benefit of cheaper raw material imported from outside India and also import of finished products from its subsidiaries out side India.
Consessional import duty specified products used by health industry:
Basic customs duty reduced from 5% to 2.5% on Iodine, from 15%/30% on Soya protein/Soya protein concentrate to 10%, from 10% to 5% on probiotics.
Comment: The reduction in import duty is positive for local players. Most of these products are used in food supplements and other nutritional products. It would help local players to compete with MNCs which commands substantial market share.
Net Impact of Budget: We view net impact of Budget as negative in view of increased tax burden on few players and increased excise duty. However, extention of wighted deduction for R&D expenditure for 5 years is a positive for Pharma industry. Besides, reduction in customs duty on raw materil used in medical devices/monitoring systems would not only help local manufacture but also to healthcare industry and infrastructure.
....more info