By Ashish Jain
New Delhi: Budget 2025 healthcare expectations: As India Inc is eagerly awaiting the simplification of tax laws, initiatives to reduce litigation and progressive policy announcements in Budget 2025. It is expected that the pharmaceutical and healthcare industry will remain at the centre stage of the government’s growth agenda. Having grown from a market value of US$4 billion in 2000 to US$58 billion today (with an equal split between exports and domestic consumption), the pharma sector is projected to reach US$450 billion by 2047, growing at a CAGR of 9per cent.
The Union Budget 2025 presents an opportunity to propel this sector toward innovation, self-reliance, and global leadership. The Pharma companies are seeking simplification and streamlining of regulatory and tax processes in the upcoming budget. The expectations include policies to boost local manufacturing under the “Make in India” initiative, enabling the sector to remain globally competitive while ensuring affordable healthcare solutions.
Augmenting investment in Research & Development (R&D) and innovations:
Indian pharma companies allocate just 6per cent of their revenue towards R&D compared to 20per cent by global peers. To spur R&D and innovation, the government may:
Reintroduce weighted deductions for R&D expenditure, offer tax holidays, and extend Patent Box benefits to include sales of products manufactured from the patented technology developed in India. Consider removing the turnover criteria for safe harbour provisions related to R&D. Introducing Patent Term Extension and Data Exclusivity could boost pharmaceutical innovations. Additionally, given the situations faced during COVID-19 pandemic and the looming challenge posed by the Human Metapneumovirus (HMPV), it is imperative that the government should emphasize bolstering innovation for pharmaceutical industries.
The government has reduced the patent approval time from the current 48-month average to about 31 months which will help in attracting more international pharmaceutical companies towards the Indian IP framework. Further, the “Biotechnology for Economy, Environment, and Employment” (BioE3) policy, launched in August 2024, marks a promising initiative. Additional funding for biotechnology, AI-driven pharma research, and bio-manufacturing infrastructure will help position India as a leader in advanced pharmaceutical manufacturing.
It is pertinent to mention that the inclusion of pure R&D companies under section 115BAB of the of the Income Tax Act, 1961 (’the Act) will augment domestic R&D capabilities and reduce India’s dependence on imported biologics.
Enhancing APIs Self-Reliance:
India imports 35per cent of its API requirements, predominantly from China, posing risks to supply chain stability. In FY 2023-24, India imported APIs and bulk drugs worth around US$4.56 billion, with China supplying about 70per cent of these imports. Budget allocations and incentives are needed to
Extended PLI to pharma companies as the Indian market for API has been growing strongly in recent past years. Extend profit linked deductions under section 80-IC of the Act for backward regions for a longer duration, for setting up manufacturing units in specified backward regions. Sunset clause for commencement of manufacturing or production should be further extended till 31 March 2026 along with broadening the benefits (of lower tax rate) to include new manufacturing ‘units’ of existing companies.
Streamlining the Imports of Refurbished Medical Devices in India:
The medical device industry in India faces challenges due to the lack of a clear regulatory framework for importing and selling refurbished medical devices. This has limited access to affordable equipment for under-served communities and caused financial losses for the industry.
To address this, the government could introduce a policy for refurbished medical devices, ensuring safety and efficacy through necessary provisions such as minimum 7-year shelf life guaranteed by the Original Equipment Manufacturer (OEM) or authorised representative, OEMs or authorised representatives must provide undertakings for adherence to regulatory provisions set by the government, extending benefit of additional depreciation under the tax laws on such imported second hand plant and machinery, etc.
Further, incentivizing investors for local manufacturing of high-tech equipments will foster healthy competition, ultimately benefiting the patients at large.
Rationalizing Tax Provisions for Free Sample Distribution:
It is a standard trade practice to provide free samples in the pharma industry. This practice is permitted under UCPMP, 2024, up to a permissible threshold and subject to certain conditions. However, section 194R of the Act applies to free samples considering them as benefits.
To support the essential business practice of distributing free samples, if the same are distributed in compliance with the UCPMP policy, they should not be subject to withholding tax under section 194R of the Act. Moreover, withholding tax on free samples typically becomes an additional expense for pharmaceutical companies, thereby increasing their financial burden. Similarly, ITC (Input Tax Credit) on free samples and on destruction of expired goods should be allowed. Further, adherence with the provision leads to an increase in administrative and compliance burden.
Reduction in costs of Medical Device and Essential Drugs:
India’s medical device sector relies heavily on imports, accounting for 70-80per cent of the market. Import duties inflate prices by 10 to 30 times, highlighting the need for reductions of import duties to lower healthcare costs and enhance affordability. Currently, the varied Goods and Services Tax (GST) rates (18per cent/ 12per cent) add complexity for manufacturers and distributors alike and companies want to rationalize to a lower rate of 12per cent/ 5per cent respectively.
It is suggested to reduce the import duties on specified life-saving drugs, critical medicines, diagnostic kits or equipment to bring more drugs/ medicines under the lowest rate of import duties or exemption.
Investing in Healthcare Infrastructure and Digital Health Development:
Enhancing healthcare infrastructure is crucial for swift responses to health crises and improved pandemic management through better testing facilities, telemedicine expansion, and efficient supply chains for medicines and vaccines.
Further, with the rise of digital health, the budget could allocate funds for the development of digital infrastructure, such as electronic health records, telemedicine, and AI-driven diagnostic tools. Special tax benefits such as introducing weighted deduction on expenditure for initial setup phase, tax exemption in the initial setup phase on income earned followed by concessional tax rate in the subsequent years could be granted for creation of healthcare centres in rural/ economically backward areas to encourage expansion of healthcare access across India.
Despite the noteworthy increase in healthcare spending from 1.4per cent of GDP in 2017-18 to 1.9per cent in 2023-24, there remains a palpable anticipation for Budget 2025 to fulfil the National Health Policy 2017’s target by elevating allocations to between 2.5per cent and 3per cent of GDP. Such a fiscal commitment, coupled with strategic tax reforms and policy measures, is poised to significantly energize the Pharma and Healthcare sector to continue the path of embracing digital transformation and bring cutting edge therapies, potentially propelling India to the forefront of global pharmaceutical leadership.
(Ashish Jain is Tax Partner, EY India. Jhankhana Thakkar – Tax Professional & Tanvi Doshi – Tax Consultant, EY India also contributed to this article. Views expressed are personal)
