Budget 2023: Govt Should Position India As Innovation, R&D Hub For Healthcare Sector

India presents numerous opportunities for the pharmaceutical and healthcare industry, both in terms of supply potential as well as growing domestic demand. The country’s manufacturing capabilities are evident from the fact that India is the largest provider of generic drugs globally. Healthcare too has become one of the largest sectors in India, employing approximately 4.7 million people as of 2021. 

The outlook is promising from a domestic demand perspective, with positive economic drivers such as high economic growth, rising income levels and increased health awareness. 

Having already established itself as the pharmacy of the world, the time is right to capitalise on other opportunities – and Budget 2023 can activate strategic levers for this.

A key focus area should be to position India as an innovation and R&D hub. Targeted incentives are necessary for different contributors such as large MNCs, MSMEs, start-ups, Venture Capital funds, research institutions, etc., to ensure greater progress with clearly visible results. Besides continuing R&D in generics, companies should be incentivised and supported to invest in R&D of complex and innovative products and solutions. Also, efforts should be made to tap the global contract research opportunity. This will help the industry evolve from ‘Make in India’ to ‘Develop and Make in India’. With its work on COVID 19 vaccines, India is now no longer perceived as only a manufacturer but also as an innovator and a developer.

Liberal budgetary allocations coupled with conducive framework of policies, regulations and incentives will help India position itself more promisingly in this sector. In recent years, the government has rolled out Production-Linked Incentive (PLI) schemes, which have provided impetus to the pharmaceutical sector. Introducing Research-Linked Incentive schemes can give boost to development and innovation which will go on to contribute positively towards the change in perception. Further, tax incentives would help prioritise funds for R&D. Weighted deduction for expenditure on R&D should be reintroduced, with higher deduction for complex projects and highlight focus on critical drugs to address shortages. Deduction should be allowed for capital as well as revenue expenditure, including expenditure on outsourced R&D. Eligibility to weighted deduction should also be extended to companies that have opted for the new tax regime which entitles a lower tax rate of 25 per cent (plus surcharge and cess).

Healthcare infrastructure is another important aspect along with improving reach through digitalization and technology. An increase in healthcare budget should be complemented by incentives for capital expenditure and special benefits for technology-enabled healthcare services. Not only would this improve availability of primary and secondary medical facilities across the country, but it would also enhance the potential for medical tourism in India.

For overall growth of the industry, it is critical to attract investments into India. Tax incentives such as investment allowance and accelerated depreciation for capital expenditure, extending the timeline for eligibility to a lower tax rate of 15 per cent (plus surcharge and cess) and benefits to Venture Capital funds and other investors, could be useful.

Further, it should be clarified that distribution of free product samples up to a permissible threshold is a pure marketing expenditure; it is neither prohibited by MCI Regulations[1] nor impacted by the decision of the Supreme Court[2]. This would align the position with The Drugs and Cosmetics Rules, 1945 which recognises the practice of providing drugs for distribution to medical professionals, as free samples. Also, in keeping with the government’s mission of affordable healthcare, input tax credit should be allowed on free samples. 

It should also be clarified that low value brand reminders given as part of marketing activity, should not be subjected to disallowance, especially since the MCI regulations also do not provide penalty for accepting such items of value below Rs 1,000.

From the nation’s perspective, it is equally relevant to focus on inclusion, to make healthcare more affordable and accessible to all. The government should continue with the existing import duty concessions for medicines, as any discontinuation thereof in the current scenario will impact the accessibility of such medicines at an affordable price. Further, the government should consider rationalisation of GST rates of equipment required for diagnosing and treating life threatening diseases.

With the COVID-19 experience, many individuals now feel the compelling need to obtain a suitable health insurance scheme to ensure they are covered during unforeseen times. Under such circumstances, health insurance becomes essential. Therefore, it would be apt to tax these under the 5 per cent GST slab to make it more affordable for people and prompt them to avail quality healthcare. Currently, most health insurance schemes/products are taxed under 18 per cent GST slab which increases the premium to 118 per cent for the end consumer. Higher income-tax deduction for medical insurance premium could help make health insurance more affordable and thus achieve greater penetration. Likewise, income-tax deduction for purchase/subscription to HealthTech solutions such as wearables, remote monitoring, etc. should make these more accessible and improve overall health outcomes. Considering India's G20 presidency, these measures should display the government’s keen commitment to the healthcare agenda.

Digital technologies and digital financial services would also have to play a significant role for moving towards financial inclusion and universal health coverage. Special benefits should be provided for those who develop digital solutions and enable e-consulting, e-pharmacy and e-diagnostics to expand healthcare access. A supportive but strong governance mechanism is needed for progress in this space. 

Given the enormous growth potential in India, we are looking forward to Budget 2023 to pave the way for unlocking value for the industry!

Authors- Jimit Shah, Partner, Deloitte India & Shivali Valecha, Director, Deloitte Haskins and Sells

Contributors – Maitri Vikam, Manager, Deloitte Haskins and Sells & Ruchi Shah, Manager, Deloitte Haskins and sells