Taxing trials

Jun 20 2014, 00:08 IST
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SummaryThere is a need to exempt the clinical trial supply chain from service tax

India is emerging as a potential destination for clinical and pre-clinical trials of pharma products due to its multi-ethnic population, skilled medical and para-medical manpower, relatively good hospital network in cities and, of course, lower cost. Bulk of the work by this industry is performed for foreign sponsors (pharma companies). However, the gaps in the service tax law are slowly ensuring that this infant dies an early death due to high service tax cost in the supply chain. The question is whether the upcoming Budget will address the woes of this sunrise industry?

Any new drug molecule or a variant of an old molecule, or a new medical implant device (for example, a stent) needs to be tested extensively on animals and humans (referred to as pre-clinical and clinical trials, respectively) before getting any approval from regulatory authorities (drug administrators in any country).

Clinical trials have extensive benefits to India besides the foreign exchange. With all checks and balances in place, the finance minister declared during his Budget speech in 2007 that to make India a preferred destination for drug testing, I propose to exempt clinical trial of new drugs from service tax. But what the mandarins at North Block missed is that bulk of the supply chain in the clinical trial is exposed to service tax even today and more so after the introduction of the negative list regime of service tax from July 1, 2012. As can be seen from the accompanying table, not just the percentage but the actual number of clinical trials conducted in the country is declining.

From March 1, 2007, the government exempted services of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organisation (CRO) approved to conduct trials by the Drug Controller General of India. Similar exemption is continued even under the negative list regime.

The exemption is restricted only to the activity of clinical trials performed by the CRO on new drugs. But it leaves out the trials of already existing drugs and trials of a medical device. It also leaves out the ambit of exemption all other players in the supply chain such as the logistics service provider, hospital, doctor and a data analytics company.

Some of these players like logistics service providers are often directly engaged by sponsors abroad. Till July 2012, such activities were called business support services and were held to

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