BUDGET - India extends tax holiday for hospitals, cuts duty

Enlarge Photo A volunteer from the U.S. scrubs a floor in a ward at a hospital in...

Fri, Feb 29 11:27 PM

India on Friday cut excise duty on goods produced in the drug sector and extended a five-year tax holiday to hospitals set up any where in India, except in certain urban areas, boosting shares of healthcare and drug firms.

Finance Minister Palaniappan Chidambaram, in his budget for 2008/09, proposed halving the excise duty to 8 percent.

The customs duty on certain specified life saving drugs, and its bulk drug ingredients, will be halved to 5 percent, besides exempting them from excise or countervailing duties, he added.

The industry welcomed the duty cuts and the tax breaks for hospitals.

"The reduction of the excise duty by half is a big big plus for the pharmaceutical companies. This will make medicines cheaper. It will boost demand," said Hitesh Gajaria, partner (pharma) with consulting firm KPMG India.

"Certain states provide a differential duty structure. This will reduce the duty differential."

The tax holiday that was so far given only to hospitals in the rural sector will be extended to those set up in tier I and tier II cities, Chidambaram said.

"Healthcare is finally happy. We've waited 20 years for something like this," said Sangita Reddy, executive director of operations at Apollo Hospitals.

"This will encourage big players to move into smaller cities while encouraging smaller players to start new facilities."

Apollo Hospitals ended 1.3 percent higher while Fortis Healthcare closed 7.4 percent higher and Max India closed 1.2 percent up.

R&D SOPS: NOT ENOUGH

The industry, however, was disappointed that the minister did not extend the duration of the tax breaks given for research and development or provide tax break for pure R&D companies.

To encourage outsourcing of R&D, Chidambaram proposed allowing a weighted deduction of 125 percent on any payment made to companies engaged in R&D, but left intact the tax cut of up to 150 percent of a company's research expense.

"I am highly surprised and disappointed there was nothing done there," said Ranjit Shahani, managing director of Novartis India.

Shares of Ranbaxy, Dr. Reddy's and Wockhardt closed higher, but Glenmark, which is primarily an R&D company, fell nearly 5 percent. Sun Pharmaceutical and Nicholas Piramal also ended lower.

These companies have either spun off or are planning to spin off their R&D wings into separate entities.

The industry was also unhappy that the budget did not extend the tax holiday on export-oriented units beyond 2009, when it is set to expire.

The industry, a net exporter, has been hit by a strong rupee, which gained more than 12 percent against the dollar in 2007.

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