Its final: No tax exemption to pharma companies on giving freebies to doctors

The confirmation regarding the new amendment, which is set to take effect from April 1, came with the Finance Budget 2022.

It has been stated in the explanatory memorandum to the Finance Bill that, "The legal position is clear that the claim of any expense incurred in providing various benefits in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37 of Act being an expense prohibited by the law."

Often the subject of tax litigation, expenses incurred by a pharma company in providing "freebies" to doctors continues to be bone of contention.

Medical Dialogues has been reporting about this issue for several years. The Government had for several years been considering the possibility of issuing a directive of 'no gifts' to the doctors for all pharmaceutical companies.

Earlier, the Central Board of Direct Taxes (CBDT) had clarified that the claim of any expense incurred in providing freebies in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under Sec. 37(1) of the Income-tax Act, being an expense prohibited by law.

However, this IMC's code of conduct applies only to medical practitioners and doctors, and not to pharmaceutical companies or the healthcare sector. Therefore, the Council's regulations could not be used to disallow a drug company's expense claims.

Also Read: ITAT larger bench to decide on the fate of pharma freebies to doctors

Last year, the Income-Tax Appellate Tribunal (ITAT) in Mumbai, while deciding the fate of pharma freebies to doctors had observed that freebies from pharma companies came with its strings attached, adds TOI.

Under the Medical Council Act and its Rules, freebies cannot be lawfully accepted by medical professionals. Besides, claims of such expenses are denied as per the explanation to Section 37(1) of the I-T Act, if the expenses have been incurred for a purpose that is either an offence or prohibited by law. The Finance Act, 1998 had also inserted this explanation with retrospective effect from April 1, 1962. In that case, the total amount of tax dispute was of Rs 248.74 crore.

Also Read: Pharma Cos not under MCI, hence can claim deductions on promotion to doctors: IT Tribunal

As per the latest media report by Money Control, now the Government has decided to put a stop to pharma freebies as from April 1, the companies won't be allowed claim the cost of various freebies offered to doctors as a business deduction.

These tax amendments have been included in the Finance Bill, 2022 presented by the Finance Minister Nirmala Sitharaman. In the latest amendment, the Government has clarified that with an aim to make the intention of the legislation clear and for making it free of any misinterpretation, it has introduced proposal of inserting another explanation for clarifying that the expression "expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law".

"The legal position is clear that the claim of any expense incurred in providing various benefits in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37 of Act being an expense prohibited by the law," stated the explanatory memorandum to the Finance Bill.

While commenting on the matter, S Srinivasan, Co-Convener of the All-India Drug Action Network, a body representing the rights of patients, informed Money Control about the ambiguity regarding the matter because even though the code of medical ethics prohibited doctors from taking gifts, it didn't prohibit the companies from giving one.

"Many of us have been demanding such a law to curb unethical marketing by pharma companies and while at present there is a Voluntary Code propagated by the government that exhorts the pharma companies not to give gifts to doctors, truth is that no pharma company wants a law," he said.

With this amendment, now the taxpayers will now be prohibited from claiming any expenses incurred for any purpose of offence or which is prohibited by any law, as a business deduction- both in India or overseas.

So, now the pharma companies won't be allowed to claim any expenditure as a form of the benefit provided to a doctor if it violates any law or rule governing his/her professional conduct.