India Hampers Clinical Trials By Withdrawing Service Tax Exemption

As part of an effort to broaden the tax base, Indian Finance Minister Arun Jaitley withdrew the service tax exemption from Indian and foreign drug companies and contract research organizations (CROs), making it more expensive to run clinical trials. Mr. Jaitley’s first Budget is not final yet, as it is awaiting Parliament approval. Jaitley said in an Economic Times article, "In recent times, among indirect taxes, service tax has shown the highest rate of growth. To broaden the tax base in service tax, it is necessary to prune the negative list and exemptions to the extent possible.”  

Trial Costs Go Up

According to the Business Standard, removing the exemption will negatively affect the pharmaceutical industry’s wallet. An analyst from the Business Standard said that the cost of a clinical trial will rise 12.3 percent. The news has alarmed the industry, especially the domestic CRO industry, which mediates trials for foreign and domestic companies. Newly established CROs or small companies may find themselves out of business if the Budget goes into effect.

This move could even lead companies to move their clinical trial work abroad. Indeed, Lupin, a leading pharmaceutical company in India, has indicated that it will be moving trials abroad to avoid the tax. Ramesh Swaminathan CFO at Lupin, said, “It is imperative for the government to offer tax incentives to encourage innovation in R&D and assist in developing and honing Indian IP (intellectual property)."

Indian Trial Environment

India has been struggling with regulations regarding clinical research, especially in the last few years as the Supreme Court and the government have instituted new regulations for trials on humans. Prior to the regulations, 200 trials were approved on average each year compared to the 25 trials approved this year. In 2013, India approved 35 new drugs compared to the seven approved so far this year. Even generic drug makers are affected by the proposed budget as India requires them to run trials for generics, which are considered new drugs.

Indian Society of Clinical Research

The Indian Society of Clinical Research opposes the service tax exemption withdrawal saying that it is a disincentive to doing clinical research in India. Suneela Thatte, President of the Society, said that a sixth of the world population lives in India and it has a high incidence of disease. She said that India needs to foster an environment that encourages clinical research rather than making it a more expensive endeavor.