Union Budget Impact on the Healthcare sector

Transcription

1 Union Budget Impact on the Healthcare sector March 2013

2 Contents 03 An overview 05 Key expectations 06 Key policy initiatives 07 Direct tax proposals 11 Indirect tax proposals 14 Our offices

3 Union Budget Impact on the Healthcare sector 3 An overview An overview Accounting for 5.6% of India s 'Gross Domestic Product' (GDP), the healthcare sector is one of the most significant drivers of the economic and social growth in the country. The healthcare expenditure of the country, which represents a mere 1-1.5% of the total worldwide healthcare bill, is expected to grow to 8% by financial year (FY)13, as per industry estimates. The healthcare sector is the second largest service sector employer in the country, owing largely to its deep and forward linkages with the 'Information Technology' (IT) and 'Business Processing Outsourcing' (BPO) sector of the country. Besides, pharmaceuticals, hospitals, drugs and diagnostic centres are among the major contributors to the 'Foreign Direct Investment' (FDI) inflows in the country. During , the segments attracted FDI inflows worth US$ 3.5 billion. Further, during April 2000 and September 2012, hospital and diagnostic centres attracted FDI to the tune of US$ 1.4 billion, while the FDI inflows in the medical and surgical appliances segment stood at US$ million during the same period. The cumulative FDI inflows in the drugs and pharmaceuticals sector between April 2000 and November 2012 was US$ 9.77 billion. Growth drivers Increasing demand for specialised and quality healthcare services and facilities is fuelling the growth momentum of the healthcare sector in the country. Some of major growth drivers of the sector are: decline in cost resulting from rupee devaluation promoting medical tourism increasing population changing demographics growing lifestyle-related health issues cheaper costs for treatment deregulation of health insurance improving health insurance penetration increasing disposable income government initiatives increased government and private spending on healthcare infrastructure growing market for clinical trials increasing attractiveness of India as a low-cost R&D destination impending patent cliff in the US rising success of Indian firms in getting 'Abbreviated New Drug Application' (ANDA) approvals

4 Union Budget Impact on the Healthcare sector 4 An overview Challenges Some of the major challenges curtailing the growth of healthcare sector and the service delivery systems in the country include: low availability of qualified practitioners in rural areas dearth of avenues for easy funding of healthcare projects availability of hospital beds lagging far behind the global average lack of requisite urban healthcare infrastructure to bridge the growing demand-supply gap less thrust on developing affordable, low-cost basic healthcare services Regulatory initiatives In order to maximise the growth potential of the healthcare sector in the country, the government has been undertaking various policy initiatives, such as: increasing the allocation for National Rural Health Mission from Rs 18,115 Crores to Rs 20,822 Crores permitting 100% FDI under the automatic route for health and medical services launching the National Urban Health Mission expanding the purview of the Pradhan Mantri Swasthya Suraksha Yojana to upgrade seven additional government medical colleges proposing to extend the 5% concessional basic customs duty to six specified life-saving drugs/vaccines with full exemption from excise duty reducing the basic customs duty and excise duty for soya products, iodine and probiotics

5 Union Budget Impact on the Healthcare sector 5 Key expectations Direct tax measures Tax and other incentives to boost hospital infrastructure development and 'infrastructure' status for availing benefits under Section 80IA of Income Tax Act, 1961 (IT Act). Indirect tax measures reduction in rate of customs duty from 10% to 5% on formulations was expected, in line with the Challiah Committee in its long term financial policy recommendations service tax exemption was desired on right to use trademarks or patents usually granted by an entity outside India to an entity in India

6 Union Budget Impact on the Healthcare sector 6 Key policy initiatives Healthcare initiatives Health for all remains priority throughout the Union Budget and to reiterate this commitment a total of Rs 37,330 Crores has been infused for Health & Family Welfare. National Health Mission (NHM) creation of a new integrated NHM with an allocation of Rs 21,239 Crores to provide effective healthcare to urban/ rural population throughout the country with special focus on states having weak public health indicators and /or weak infrastructure scope of NHM extended to cover Ayurveda, Unani, Siddha and Homoeopathy to give fillip to such traditional medical forms Health insurance health insurance covers under Rashtriya Swasthiya Bima Yojana extended to include Rickshaw pullers, taxi drivers, sanitation workers, rag pickers and mine workers. National Programme for the Health Care of Elderly allocation of Rs 150 Crores to National Programme for the Health Care of Elderly (implemented in 100 selected districts of 21 States) to provide accessible, affordable, and high-quality long term, comprehensive and dedicated care services to an ageing population. Specifically, eight regional geriatric centres being funded for the development of dedicated geriatric departments Medical education to improve medical education, training and research Rs 4,727 Crores has been allocated additional funding of Rs 1,650 Crores provided to AIIMS-like institutions commissioned in September 2012 for developmental activities

7 Union Budget Impact on the Healthcare sector 7 Direct tax proposals Surcharge existing 5% for domestic companies and 2% for foreign companies to continue if total income exceeds Rs 1 Crore but does not exceed Rs 10 Crores higher 10% for domestic companies and 5% for foreign companies if total income exceeds Rs 10 Crores. Incentive for substantial investment in plant or machinery for manufacturing entity additional 15% on investments of more than Rs 100 Crores, made in new assets (plant and machinery) between 1 April 2013 to 31 March 2015 this deduction is in addition to current depreciation rates the above deduction is available to companies engaged in the business of manufacture of an article or thing transfer of new assets restricted for a period of 5 years. However this restriction does not apply to amalgamation and demerger the amendment is proposed to take effect from FY The above incentive will provide substantial benefits to investments in greenfield / significant asset expansion projects undertaken by pharmaceutical / medical equipment manufacturers. Increase in rate of withholding tax for payments of royalty or fees for technical services (FTS) Tax rate for a non-resident taxpayer with respect to income by way of royalty or FTS proposed to be increased from 10% to 25%. Currently, India has tax treaties with 84 countries, majority of which provide for withholding tax on royalty or FTS at rates ranging from 10% to 25%, whereas the tax rate under the IT Act is 10%. This resulted in taxation at a lower rate of 10% in some cases, even where the tax treaty provided for a higher rate. The proposed increase in tax rate for royalty or FTS is expected to correct this irregularity in the IT Act. This would result in additional withholding of 5% to 10% in cases where the existing tax treaties provide for rates higher than 10% (e.g. USA, UK, Denmark, Australia, Canada etc.).

8 Union Budget Impact on the Healthcare sector 8 Direct tax proposals This amendment attains significance in relation to healthcare companies considering that substantial royalty payments are made to non-residents for drug licenses, patents, trademarks, etc. Further, technical services availed by such companies will also be subject to the higher withholding tax. Widening the scope of Central Government Health Scheme (CGHS) Section 80D of the IT Act provides for a deduction of Rs 15,000 for contribution made towards the CGHS. Proposal is to allow deduction in respect of investment made into health schemes similar to CGHS as may be notified by the Central Government. Relaxation of eligibility conditions of certain life insurance policies As per the existing provisions contained under Section 80C(3A) of the IT Act, deduction is available up to 10% of the sum assured in respect of any premium or other payment made on a life insurance policy. The proposed amendment increases the permissible premium rate from 10% to 15% of the capital sum assured in respect of certain life insurance policies (issued on or after 1 April 2013) for persons with disability or suffering from specified diseases.

9 Union Budget Impact on the Healthcare sector 9 Direct tax proposals 'Pass through' status to Venture Capital Funds (VCF) registered under the AIF Regulations Section 115U of the IT Act provides that income accruing or arising or received by a person out of investment made in a Venture Capital Company (VCC) or VCF shall be taxable in the same manner as if the person had made direct investment in the Venture Capital Undertaking (VCU), thereby providing a tax pass through status to VCC/VCFs. In order to extend the pass through benefit to similar venture capital funds registered under the AIF regulations there has been a change in the definition of VCU, VCF and VCC to include those registered under the new regulations. The amended definitions shall take effect retrospectively from FY In view of the above, the existing provisions contained in Section 10(23FB) of the IT Act provides that any income of venture capital company or venture capital fund set up to raise funds for investment in a venture capital company shall be exempt from tax provided the conditions specified in SEBI (Venture Capital Fund) Regulations, 1996 (VCF regulations) is fulfilled. The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF regulations) have replaced the SEBI VCF Regulations from 21 May 2012.

10 Union Budget Impact on the Healthcare sector 10 Direct tax proposals Lower rate of tax on dividend received from foreign companies Reduced rate of 15% on dividend received by an Indian company from specified foreign companies extended till 31 March Removal of cascading effect of dividend distribution tax (DDT) DDT would not be applicable on dividends declared by the Indian company if all the following conditions are satisfied: dividends declared are from the dividends received by the Indian company from the specified foreign company (the Indian company to hold more than 50% in nominal value of the equity share capital of the foreign company) dividends are declared by the Indian company in the same year in which it receives dividend from the specified foreign company the Indian company has paid 15% on receipt of dividend from the foreign company Transfer Pricing Regulations Safe Harbour provisions The Finance Minister has now provided a timeline of 31 March 2013, by which the transfer pricing Safe Harbours can finally see the light of the day. Taxpayers engaged in cross border related party IT-ITES services have witnessed a spate of high pitched transfer pricing assessments consistently over the last 8 years of transfer pricing audits. Pharma companies engaged in contract research and development (R&D) have also faced the heat. India is currently counted amongst the top 3 nations in the world in terms of the number of transfer pricing cases in litigation. Considering the current level of transfer pricing litigation, the Safe Harbour rules are something to definitely watch out for although the exact nature of Safe Harbours likely to be prescribed is not available in the public domain yet. This amendment will take effect from 1 June 2013.

11 Union Budget Impact on the Healthcare sector 11 Indirect tax proposals Budget scenario India has become an attractive destination globally for availing the benefit of high quality healthcare services of global standards, at a very reasonable price. However this budget does not have much to offer this sector. Central excise Ayurvedic, Unani, Siddha, Homeopathic or Bio-chemic medicines (generic as well as branded) included under MRP based Valuation with abatement of 35% on MRP (see Not 01/2013 -CEx) assessing authority empowered to recover excise duties unpaid by defaulter-assessee from any other person who is required to pay monies to such defaulter (including post offices, banks and insurance companies) advance ruling provisions expanded existing manufacturer can seek advance ruling for proposed manufacture/ production of new products Service tax advance Ruling provisions is now proposed to be made available to "resident public listed companies" as well Service Tax Voluntary Compliance Encouragement Scheme (STVCES) introduced to provide one-time benefit for defaulters to pay service tax dues without attracting interest and penalty any show cause notice (SCN) issued alleging "malafide" intent and demanding service tax dues together with interest and penalty for past 5 years would be restricted to only 1.5 years from relevant date if such malafide intent is not proven before appellate authority commissioner, Service Tax now empowered to authorize arrest of defaulting assessees through issuance of appropriate orders to Superintendent such orders non-bailable in specific cases

12 Union Budget Impact on the Healthcare sector 12 A comprehensive suite of tax and regulatory services The changes in the tax and regulatory environment constantly challenge large and growing businesses, particularly those operating internationally. How your business meets this challenge can have a significant impact on your bottom line. The more your business grows, the more complex tax requirements can become. Grant Thornton can help you minimise your tax exposure and highlight the risks presented by constantly evolving and increasingly complex legislation. Drawing on our knowledge and understanding of tax regimes in India and around the world, we offer timely information and independent advice. Through legitimate planning, we consider issues that arise within specific types of tax, as well as the tax implications of a new project, or a change to the business. We work with you to develop bespoke tax-planning strategies suitable for your specific business structure, and our solution-oriented approach is designed to help you understand and minimise the tax challenges your business faces. About Grant Thornton India LLP Grant Thornton India LLP is a member firm within Grant Thornton International Ltd. The firm is one of the oldest and most prestigious accountancy firms in the country. Today, it has grown to be one of the largest accountancy and advisory firms in India with over 1,200 professional staff in New Delhi, Bangalore, Chandigarh, Chennai, Gurgaon, Hyderabad, Kolkata, Mumbai and Pune, and affiliate arrangements in most of the major towns and cities across the country. As a member firm within Grant Thornton International, the firm has access to member and correspondent firms in over 120 countries, offering our clients specialist local knowledge supported by international expertise and methodologies.

13 Union Budget Impact on the Healthcare sector 13 A comprehensive suite of tax and regulatory services Direct Tax corporate tax transaction tax expatriate taxation International Tax outbound advisory transfer pricing US tax Indirect Tax service tax and central excise value added Tax (VAT)/ works contract/ entry tax etc. customs and foreign trade policy goods and services tax (GST) state industrial policy Regulatory corporate law foreign exchange control regulations securities law competition law Compliance & Outsourcing accounting support payroll processing and delivery secretarial support Tax Dispute Resolution advisory on litigation process effective identification and implementation of dispute resolutions representation before the tax authorities, tribunals, advance ruling authorities and settlement commissions Specialist Advisory financial institutional investors (FIIs)/private equity (PE) funds privately held businesses For more details, please write to us at contact@in.gt.com Thought Leadership Publications The firm publishes a variety of reports and newsletters designed to keep dynamic business leaders apprised of issues affecting their companies. The publications are available at Visit our Blog at for leading-edge news and views on various industries.

14 Contact us NEW DELHI National Office Outer Circle L 41 Connaught Circus New Delhi T BENGALURU Wings, 1st floor 16/1 Cambridge Road Ulsoor Bengaluru T CHANDIGARH SCO 17 2nd floor Sector 17 E Chandigarh T CHENNAI Arihant Nitco Park, 6th floor No.90, Dr. Radhakrishnan Salai Mylapore Chennai T GURGAON 21st floor, DLF Square Jacaranda Marg DLF Phase II Gurgaon T HYDERABAD 7th floor, Block III White House Kundan Bagh, Begumpet Hyderabad T KOLKATA 10C Hungerford Street 5th floor Kolkata T MUMBAI 16th floor, Tower II Indiabulls Finance Centre SB Marg, Elphinstone (W) Mumbai T PUNE 401 Century Arcade Narangi Baug Road Off Boat Club Road Pune T Disclaimer: This document is prepared for information purposes only. No reader should act on the basis of any statement contained herein without seeking professional advice. The firm expressly disclaims all and any liability to any person who has read this, document or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document. Grant Thornton India LLP. All rights reserved. Grant Thornton India LLP (formerly Grant Thornton India) is registered with limited liability with identity number AAA-7677 and its registered office at L-41 Connaught Circus, New Delhi, Grant Thornton India LLP is a member firm within Grant Thornton International Ltd ( Grant Thornton International ). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.