The Union Budget proposal to extend the weighted tax exemption for in house R&D by another 5 years to 2017 is expected to encourage pharmaceutical companies to invest more in research and development, industry sources said on Saturday.

While the industry would be disappointed as nothing substantial was announced for the sector, the five—year extension to the 200 percent R&D tax deduction is a welcome move. Liberalisation of external commercial borrowing rules and the boost to investment in infrastructure sector are particularly laudable, Orchid Chemicals & Pharmaceuticals Chairman and Managing Director, Mr K Raghavendra Rao said.

A focus on breakthrough research will spur R&D efforts in the country and give us an edge, Lupin’s spokesperson said.

At present, companies engaged in certain businesses are eligible for a tax deduction of 200 percent on certain expenditure incurred by them on in—house research and development facility. This deduction was slated to expire on 31 March 2012. The industry had demanded extension, as the innovation has become an imperative, and it is a welcome move especially given that implementation of direct taxes Code is now delayed, KPMG’s tax partner, Mr Vikram Doshi said.

The applicability of MAT to entities other than corporate houses would have a negative impact on pharma companies that have been doing business through partnerships in tax—free zones, Mr Doshi added.

Hospitals are likely to benefit from the increased rate of 150 percent investment—linked deduction for capital expenditure. However, the highly—anticipated infrastructure status to hospitals has not been granted. This negates the positive impact, Anand Rathi’s analyst Mr Sriram Rathi said.

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