Union Budget 2023: Health sciences industry wants focus on R&D incentives, innovation

Union Budget 2023: The pharmaceutical sector is expected to grow 3X to reach up to US$130b by 2030. India is the largest provider of generic drugs globally and the second-largest contributor to the global biotech and pharmaceutical workforce with its low-cost and high-quality of medicines. The pharmaceutical industry in India is a significant part of the nation's foreign trade and a key contributor to the Indian economy.

Given the increasing importance of the sector and the government's 'Make in India' push, it is imperative that there is increased investment in the sector to truly make India 'Aatmanirbhar'. The COVID-19 pandemic has brought an increased focus on amplifying the need to further strengthen the healthcare infrastructure and provide an impetus to R&D and innovation.

Budget proposals announced in Budget 2022 for Health Sciences focused on building a National Digital Health Ecosystem for India. From Ayushman Bharat Digital Mission with over four crore digitally linked health records to the launch of National Tele-Mental Health Program for providing better access to quality mental health counselling and care services with a network of 23 tele-mental health centres of excellence, the government has taken several initiatives to create an inclusive healthcare ecosystem.

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With the pandemic highlighting gaps in the overall health infrastructure in the country, there is still a need to take additional steps in strengthening the healthcare ecosystem, particularly in smaller towns and rural areas. There is also a need to build the necessary infrastructure that supports breakthrough advances in science and technology to drive innovation and give the Indian pharma and biopharma industry the necessary boost.

With the advent of technology and digital health/health-tech start-ups, there should also be a focus on encouraging the development of medical infrastructure to promote online assessment, diagnosis, and treatment of patients, enabling better access to rural areas as well. Accordingly, there needs to be a further allocation of budgetary funds for necessary infrastructure development.

India has been ranked the 3rd largest pharma industry in terms of volume and 14th in terms of value globally. India needs to move to “value-volume” play by moving up the value chain largely driven by R&D and innovation and exploring beyond generics and contract research opportunities.



Accordingly, the government needs to incentivize the shift to a discovery-oriented and science-driven approach by providing fiscal incentives and enabling policies. The government needs to set in place R&D-focused incentives for the promotion of investment, which remains an incessant and necessary ask of the sector. Given the required focus, the government can consider the following:

• R&D Incentives: Research-linked incentive schemes for companies making investments to undertake research for new drugs, new chemical entities, and/ or new biological entities (NBEs) to combat outbreaks and also explore providing a 200% weighted deduction for companies undertaking such R&D.
• Innovation Bonds: Issuance of innovation Bonds similar to the existing NHAI and REC bonds which enjoy a tax-free status (I.e. interest income being ta- free in the hands of the investor)
• Patent Box: Introduction of long pending clarification on the patent box regime to encourage Indian innovators who developed patents in India and exploit them worldwide

Given that government has provided the desired impetus for local manufacture of medical devices by way of Production Linked Incentive (PLI) Scheme, it is recommended that the levy of health cess on import of medical devices should be revisited to encourage affordable health care to all. Exemption to medicines supplied free of cost to patients is sought to be phased out by end of March 2023.

It is expected that the government will reconsider the same and continue with an exemption for the import of said goods. Likewise, the exemption to goods used for R&D in the pharmaceutical sector and biotechnology sectors should also be extended beyond 31 March 2023.

Lastly, the government may look to rationalize withholding obligations under the Income-tax Act, 1961 from an ease of doing business perspective.

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India is poised to be the global powerhouse in the pharmaceutical sector and the right policy push may provide India just the right fuel to become the 'research and innovation' hub of the world. Hopefully, the upcoming Budget would help address the concerns of the sector to enable it to contribute significantly to the “Aatmanirbhar Bharat” vision of the government.

(Hitesh Sharma is Tax Partner and National Leader – Lifesciences, EY India. Aparna Iyer, Tax Senior Manager, EY India also contributed to the article. Views are personal)