Armed with a set of new rules that were planned in August and circulated in October, the income tax (IT) department is preparing to crack down on one of the best-oiled rackets of the pharma industry: Companies paying doctors to push their respective drugs under the garb of marketing.
“We have just received the guidelines on how to track gifts given to doctors,” says a senior official of the IT department, who spoke to Forbes India on condition of anonymity.
Analysts estimate that drugmakers spend nearly five percent of their revenues on expensive gifts—LCD TVs and overseas vacations, for instance—to doctors in exchange for their drugs being prescribed.
India’s healthcare market is dominated by thousands of independent doctors who run small clinics. Even those doctors who are associated with hospitals have their own clinics.
Only about 25 percent of India’s population is covered by medical insurance. This means the vast majority of patients buy medicines with their own money. This market, estimated to be worth Rs 60,000 crore, is what drugmakers are fighting over, and they need the doctors on their side.
The new guidelines of the income tax department recognise that pharma companies often fly doctors and their families to conferences abroad, euphemistically called ‘continued medical education’ (CME). The doctors attend these conferences only for a day, and spend the rest of the days in, say, a 10-day event vacationing with their families at the cost of the organising company.
Until now, pharma companies categorised such costs on their balancesheets as marketing expenses. The IT department will no longer allow them to do so. Doctors, too, will be held accountable.
For instance, for a 10-day conference, the tax department will calculate a per-day cost of the trip, and if a doctor attends only one day of the programme, expenses for the remaining days will be subject to taxes.
“In light of the IT department’s rules on tax freebies [in the form of foreign travel] given to doctors, we will pursue a CME format to engage with doctors,” said a spokesperson for drugmaker Lupin, adding that the company follows global standards.
Currently, the United States Food and Drug Administration (FDA) norms have banned “gifts of substantial value” to doctors. However, the FDA allows companies to spend on CMEs, free dinners and drug samples, and promotional merchandise such as pens and prescription pads with embossed company logos.
The budget that pharma companies have for such freebies is huge. According to one estimate, the top 20 drugmakers in India spend about $600 million a year on only freebies for doctors. It is still a paltry sum compared to the US, where drugmakers spend $58 billion or more annually on marketing drugs, including freebies for doctors.
While the practice of giving gifts to doctors is rampant internationally, several sources told Forbes India that in India it borders on petty corruption. Doctors often refuse to write prescriptions unless they are offered at least Rs 50,000 in cash every time a new drug needs to be prescribed.
A pharma company representative says gifts for doctors in India are somewhat like this: A foreign trip, a car at the doctor’s disposal, a wall-mounted TV or the latest model of refrigerator, goodies like pens and gift vouchers, and silver or gold idols during festivals.
Pharma companies, meanwhile, are making light of the IT department’s new rules. They believe the nexus between them and the doctors is so wide and deep that it is nearly impossible to track the route and destination of the money spent.
“In the past one year, we’ve had eight to 10 pharma companies as our clients. Their minimum gift voucher for doctors is Rs 5,000, and that has given us at least Rs 1 crore in revenue,” said an official from a gifting company, which is less than two years old.
Officials of this gifting company admit they are not clear what the impact of the new IT rules will be, although the tax department is not looking into retail gift vouchers for doctors. Even if it does, the money trail will be difficult to trace.
Some years ago, the gifting scheme of a certain company had set tongues wagging in the industry, said a senior official of a rival pharma company. The first company had bought cars from an international automobile major that had just entered the Indian market to gift doctors, on the condition that they would prescribe its drugs to patients.
The vehicles would be used only by the doctors, but the pharma company would be paying the monthly installments to cover their cost. The company threatened to stop payments if the doctors did not prescribe its drugs.
Pharma companies and doctors are both to be blamed for this practice, and it remains to be seen whether or not the IT department can control it. In all likelihood, pharma companies will continue to send doctors on foreign trips, and find a way to hide the costs on their balancesheets.
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(This story appears in the 09 November, 2012 issue of Forbes India. To visit our Archives, click here.)