Tax Incentives Needed by Pharma Industry for Encouraging R&D Activities

Nilesh Modi, Rishi Kapadia

India’s role in terms of R&D has grown recently. The cost advantage of having a large pool of relatively inexpensive, English-speaking employee class makes India attractive destination for R&D outsourcing. Outsourcing R&D to India is increasingly being looked at as integral to strategic decisions of innovators, indicating the sector’s shift from a cost-driven, low-value service, to a research driven, high value activity.

Given this scenario, if India is to emerge as a R&D hub, more tax incentives would be required to be provided. The wish list in this regard could include:

Availability of weighted deduction
Presently, the provisions allowing weighted deduction of 150% are restrictive in nature and cover only expenditure incidental to R&D carried on at the in-house R&D facility. The scope of the benefit should be expanded to cover expenditure incidental to research carried outside R&D facility such as clinical trials, bio-equivalence studies etc carried on in India or in any foreign country.

Further, the weighted deduction for in-house scientific research is only allowed for computing income under the normal provisions of the Income tax Act and not for computing the Minimum Alternate Tax (MAT) liability. To encourage R&D activities, such weighted deduction should also be extended for computing the MAT liability.

Extension of sunset clause for tax holiday
Companies engaged in carrying on scientific R&D are entitled to a 10 year tax holiday in respect of profits from such activities. The tax holiday benefit has been a great source of support for Scientific and Industrial Research Organisations. However, this tax holiday is available only for units approved by the prescribed authority (ie DSIR) before March 31, 2007. The Finance Act, 2008 extended the availability of the weighted deduction benefit (discussed above) till March 31, 2012, whereas the cut off date of March 31, 2007 for the tax holiday was not extended. Such tax holiday can play a crucial role in promoting the knowledge based competitiveness of Indian manufacturers. It is imperative that the said cut off date for the tax holiday should be extended till March 31, 2012.


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