These companies would be encouraged to set up independent companies for R&D activities and create a world class infrastructure for both basic research as well as clinical research. The R&D subsidiaries would also enjoy the exemption on income arising from research in the form of royalty, licensing and technology fee for 10 years.

According to industry sources, the step will encourage increased foreign investment into research and development activity in India. According to industry sources, R&D companies are expected to receive more business in the form of contract manufacturing.

With low R&D costs, more foreign companies are expected to shift their research and development centres to India, says an industry source.

Ranbaxy's senior vice president, VK Kaul, said, "This is a positive step and would encourage more R&D spending and would facilitate growth in the industry."

"With the tax free status now being given to R&D companies, India is expected to witness increased foreign investment in R&D activities," says KB Suri, chairman, Morepen Laboratories.

"The R&D fund of Rs 150 crore would help set up basic reserach for a number of companies who do not have any R&D centres now," said Suri.

"The finance minister has lived up to his promise of making India a tax haven for pharmaceutical and biotechnology research. This is a good move and would encourage spending in the R&D activities to find new molecules and novel drug delivery system, which is a must in the post-2005 era," said Chirayu R Amin, chairman and managing director, Alembic Limited.

"The move to boost R&D activities in India would encourage us invest more in these activities and the future lies in resaerch," said Ravinder Jain, managing director, Panacea Biotech.

Jain also agreed that the tax holiday for 10 years would lead to setting up of more subsidiaries. Further, R&D contracts bagged from overseas companies would help reduce the Indian companies' own cost of research due to common infrastructure. With this, a company would be able to take up additional R&D activities, he said.