January 22, 2021 10:47:09 am
Written by Rahul Vig and Neha Gupta
While everyone is eagerly awaiting for the ‘never before Budget’ 2020-21 to be presented on February 1, the most critical sector expected to receive attention is healthcare, the front-runner in handling the Covid-19 pandemic and the one to have had considerable influence on the entire economy.
In line with the government’s plans on increasing spending on healthcare to 2.5 per cent of GDP by 2025 (as per the target in the National Health Policy, 2017), the healthcare sector is expecting more specific allotments in this year’s Budget to mitigate the Covid-19 impact and to help in the preparation and distribution of Covid-19 vaccines.
The government had launched the first phase of the PLI scheme for manufacturing of APIs (active pharmaceutical ingredients) /KSMs (key starting material) in July 2020, in line with the theme of “Atmanirbhar Bharat”, for a self-reliant India.
The scheme provides financial incentives for a period of six years to manufacturers of identified APIs/KSMs (53 critical APIs) to ensure an uninterrupted supply of raw materials for the manufacture of drug formulations. While the approach of the government for the PLI scheme and related guidelines has been appreciated, for effective implementation we expect to see increased investment in drug manufacturing through the easing of capital inflow, both debt and equity. Further, the government may consider extending the period of PLI incentives, given the duration needed to achieve commercial production.
Another important aspect is to promote digital health which is mainly being driven by health-tech companies. The pandemic has shown that tele-medicine has enormous potential in meeting the challenges of health care delivery to rural and remote areas besides several other applications in education, training and health sector management. The health-tech community would be expecting a rational policy framework to develop sustainable business models and a robust digital health ecosystem. Allocating an earmarked fund for digital health would be welcome. Benefits of lower corporate income tax rate should also be extended to health-tech companies, similar to new manufacturing set-ups and power companies to provide much-needed momentum to this critical sector.
Development of the healthcare sector is linked to investment in medical R&D, biotechnology R&D and pharma R&D. The high expenditure levels in R&D creates innovative products and helps in increasing medical tourism. Incentives for attracting investment in R&D and for bringing in innovations and affordability would be appreciated, such as introducing weighted deduction for R&D expenditures, bringing in R&D players within the reduced tax regime. There can also be steps such as setting up special zones (like a Gift City or erstwhile SEZ) to incentivise investments into contract R&D to develop and leverage the country’s skilled human capital resource.
Covid-19 has reinstated the need to have a robust healthcare infrastructure. Towards that, it is expected that the government will reintroduce tax holidays for rural hospitals with relaxed conditions such as flexibility to select beneficial years. This would give healthcare the required boost by attracting major players from the sector to invest across India.
From a GST perspective, one of the most important expectations from Budget 2021 is “Zero-rating” of GST for healthcare services and sanctioning the accumulated input tax refund to the service provider. Currently, healthcare services are exempted from GST but as there are no input tax refunds, tax is loaded onto the costs. “Zero-rating” of GST for healthcare services and sanctioning of accumulated input tax refund will ensure that the credit chain is kept intact and the cost of healthcare services is not increased due to GST. A similar approach is adopted by other major economies as well in their GST laws; accordingly, this will be in line with best practices from a tax policy perspective.
In India, GST on life-saving drugs (medicines and medical supplies) is taxed at four separate rates NIL, five per cent, 12 per cent and 18 per cent. It is expected that to reduce the cost of essential life-saving drugs, the government could lend support by categorising all life-saving drugs at the lowest rate of tax under GST.
Further relaxations could be introduced with respect to input tax credit provisions for expired goods.
The industry is hopeful that the government will provide impetus to this sector and pave the way for a sustainable growth. Having said that, it would be interesting to watch how the government balances the expectations of the healthcare sector, among others in the Budget 2021, considering that the industry has made a relentless contribution in managing the pandemic and plays a pivotal role in the overall economy.
Rahul Vig is Partner and Neha Gupta is Director with Deloitte Haskins and Sells LLP. Views expressed are that of the authors.
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