Excise or no excise?

The latest flashpoint between government and industry is centered on the possibility that excise duty exemption might be withdrawn from certain players. To make matters worse, industry itself may be divided on this issue. Sushmi Dey explores

After issues on patentability, data exclusivity and data protection, the industry is yet again divided and debating over excise free zones. The announcement of excise and income tax free zones in 2003 by the Central Government was a great opportunity for many small and medium scale industries, especially for con-tract manufacturers. The announcement of excise and income tax holiday for Himachal Pradesh, Uttarakhand and Jammu and Kashmir was therefore welcomed by the industry, who pumped in a lot of investment into these states and developed world class manufacturing units.

However, the recent buzz about the government's decision to reconsider its promise to the industry has created ripples in the Indian pharma industry. Recently, the Economic Advisory Committee (EAC) headed by Dr C Rangarajan made its recommendations to the government on the issue. As per the recommendations of the EAC, exemptions should be restricted to manufacturers who manufacture under their own license and not for contract manufacturers or those who manufacture under loan license. The government's intended move to withdraw the excise exemption granted to contract manufacturers in states of Himachal Pradesh, Uttarakhand and J&K is, therefore, based on the recommendations of EAC. However, the industry is divided in its opinion on the issue.

Inception of the battle

Initially, the announcement of tax holiday for pharmacos came up in 2003 with an objective to help the development of backward and hilly areas like Himachal Pradesh, Uttarakhand and Jammu and Kashmir. It was believed that the tax holiday incentive would attract pharmacos and hence industrialisation would help these states grow. However, even by 2004-05, the announcement could not attract too many players. There were speculations that, over time, the government decision would tend to destabilise the natural geographical balance of the Indian pharma industry. There was also a nagging fear in the minds of small scale pharmacos that the government might reverse its decision, leading to a crisis.

Nevertheless, the excise free zones soon roped in a lot of players due to their inherent advantages and attractive features of good geography, quick infrastructure development and almost no corruption and co-operating authorities. "The environment was good and the land prices for both industry and residence were reasonable. The connectivity with the national capital was also quite convenient," says Navdeep Chawla, Managing Director, Psychotropics India which now has manufacturing plants in Haridwar and Uttarakhand. According to Chawla, Uttarakhand is a wonderful place for small and medium size pharmacos to look into various segments of the market. While the excise free zones have attracted contract manufacturers in major numbers, there are also players of other lucrative segments like generic and dispensing marketing, institutional business, propaganda and distribution business. "The industrial estate promoted by State Industry Development Corporation Limited (SIDCUL) is of extremely high standard and the infrastructure in these states is coming up very quickly," adds Chawla.

However, the Central Government again came up with a shift in its policy in early 2005, thereby increasing the disparity between excise free zones and non-excise free zones in terms of taxation. Prior to this shift in policy, the duty on allopathic drugs was levied on the basis of transaction value ex-factory. With the new policy, drugs were brought under the levy of excise duty on the basis of MRP declared on the packages of such drugs. This shift added a twist to the whole story.

Problems begin

As a consequence, from 2005 onwards a big stream of pharma units from different parts of the country like Gujarat, Maharashtra, Punjab and Delhi, changed course and flowed into these designated excise free zones. By 2006, more than 120 pharmaceutical units were operating in Baddi region of Himachal Pradesh. More than 500 medium size units were registered from all other sectors for setting up manufacturing facilities in these excise free zones. "After the shift in the policy in January 2005, the industry has moved to excise free zones at a rate unprecedented in the history of India. This virtually destabilised the Indian pharma industry. Almost every large scale pharma industry in India has moved for once," says Jagdeep Singh, President, Punjab Drug Manufacturing Association.

The sudden and massive migration of industries to excise free zones gradually resulted in a number of problems and crisis. Due to unplanned industrial growth in these backward areas, basic infrastructure was missing. According to Chawla, evaluation of functioning of excise free zones in the last few years will depict a large gap between the myth and reality. "Even the state industrial development corporations had not visualised such an influx of industry. There was very little land available in the developed industrial estates, resulting in escalations of price of land and huge premiums on the initial cost. As there was a very limited number of plots in the planned industrial estates and many players intended to set-up their units, industries started looking for agriculture land in the notified area. They then went ahead and set up their factory and started production.

However, entrepreneurs who decided to set up their units on agricultural land faced a dire lack of adequate infrastructure. "The cumbersome process of change of land used by the respective State Governments and other mandatory clearances consumes a lot of time," explains Chawla. Availability of housing and hotels is another problem for the industry in these excise free zones. The rates of housing and hotels are skyrocketing in places like Haridwar, Baddi and Ponta Sahib. On the other hand, essentials like roads, availability of power and drainage system still remains very underdeveloped.

But what pharmacos are bothered about is the investments they have already made in these regions, and the massive central tax benefits that they are enjoying. Pharmacos believe that things have started improving in these regions. "Difficulties are bound to be everywhere, but things are bound to improve as well and now things are better in these zones," says R K Arora, President, Himachal Pradesh Drug Manufacturing Association.

Govts rue revenue loss

Besides, the government has its own woes on the matter. As a result of massive migration of big and small pharmacos to excise free zones, governments have to bear the burnt of revenue leakages. "While a steady growth in revenue was marked from 2004-05 to 2005-06, a steep fall in revenue was estimated in 2006-07. It is estimated that the centre has lost nearly Rs 600-700 crores," informs Singh. According to Singh, the revenue losses could increase if some corrective action is not taken immediately. Ram Vilas Paswan, Cabinet Minister of Chemicals and Fertilizers and Steel in a letter to the PMO, dated July 19, 2006 said, "With effect from January 8, 2005, excise duty on pharmaceuticals has been imposed on the MRP of the product. This change compounded with the excise exemption available in some states (particularly Himachal Pradesh and Uttaranchal) has rendered pharma manufacturing (particularly by small and medium units) uncompetitive in the areas outside tax-exempt states." In the same letter, the minister also mentioned that he has been receiving representations from various non-exempt states high-lighting the plight.

Price violations
"Now the government can only take corrective measures. Our suggestion is that it should reduce the excise duty on pharmaceuticals from 16 percent to eight percent".

Apart from revenue losses, Himachal Pradesh and Uttarakhand are also being targeted for price violations and are accused of over charging despite cost advantages. It was believed that manufacturing in excise exempt states would bring own the prices of drugs. On the contrary, a report of National Institute of Pharmaceutical Education and Research (NIPER) confirmed price violations taking place in these zones. NIPER has collected data which shows that prices of drugs manufactured in excise-exempt zones are higher than those manufactured outside these zones. According to the NIPER report, the MRP of some of life saving drugs are 100-200 percent higher than the ceiling price fixed under the Drug Price Control Order (DPCO). The reports points out that brands like FCN-150 manufactured in Haridwar costs Rs 31.95 per tablet whereas the brand FUSYS by Liva Healthcare manufactured in Nashik, which is a tax non-exempt area, cost Rs 7.50 in comparison. The API is fluconazole but the price difference between these two brands was 326 percent.

The letter from Paswan to PMO also says that while on the one hand the government would be losing excise revenue, on the other hand prices of some of the medicines being produced in the tax-exempt states are higher than those in the rest of the country (due to non-charging of excise duty on MRP). Reportedly, NIPER was asked by the Department of Chemicals and Petrochemicals to investigate the reasons for the disparity in prices.

However, pharmacos manufacturing from excise-free zones dismiss these arguments. "Such allegations are completely wrong. Our prices are limited to what market forces allow us. In fact prices of some drugs manufactured by us are lower than anywhere else," says Arora. His view is seconded by S V Veeramani, Chairman and Managing Director, Fourrts Lab, Chairman-SME Committee, IDMA and Chairman-SSI Commitee, Pharmexcil. "There is no difference in the pricing of drugs manufactured in and outside excise-free zones. However, there is a lot of confusion regarding this," declares Veeramani.

For and against

Pharmacos present in excise-exempt states are now most concerned about how to protect their investments made in these zones and the tax benefits availed by them. "The government cannot revert or change the policy. Once they have made the promise, then only we planned to shift to these areas. Now we have made huge investments in establishing plants and developing our facilities in these excise exempt zones," says Arora. According to Arora, an investment of Rs 4,500 crores has been made by industries in Himachal Pradesh alone, of which Rs 1,500 crores is invested by industries and rest is on loan. Besides, Rs 3,000 crores has been invested in Uttarakhand and around Rs 900 crores in J&K. If there is a change in the policy, the small scale industry based in excise free zones will have to bear the burnt.

However, the opposite lobby refuses to buy these arguments. "The loss of investment will only be of ten to 20 percent but you cannot let two states prosper at the cost of other states," asserts Singh. He adds that there is an anomaly in the policy because the objectives of bringing developing tax heavens have not just failed but also proved counter productive. "The excise works as a fiscal to keep the MRPs down but the prices have sky rocketed. The government will have to correct the policy because anomalies cannot exist forever," emphasises Singh.

According to Veeramani, the government is acting a bit too late. "Now the government can only take corrective measures. Our suggestion to the government is that it should reduce the excise duty on pharmaceuticals from 16 percent to eight percent," suggests Veeramani. T S Jaishankar, President of the Confederation of Indian Pharmaceutical Industry (CIPI) echoes his views. "All the members of CIPI feel embarrassed because of the government's decision. Our stand is neutral in this issue and we are not taking the matter directly," says Jaishankar. Representatives from CIPI are soon going to meet the Ministry of Chemicals and Fertilizers to discuss the issue. CIPI has also called for a meeting with all its members who have plants in and outside excise exempt zones to resolve the issue. "We do not support the idea of one getting benefit at the cost of other. We have full sympathy and we understand the problem of our members who have set up their plants in excise exempt states but we also realise that if this is going to continue then our other members who are outside these zones will be ruined," explains Jaishankar.

While CIPI supports the idea of reducing excise duty from 16 to eight percent, it has also come up with few other options. "We told government to increase the abatement from 42 percent to 65 percent. Also, we recommend that the turnover exemption limit for levy of excise for SSIs in the pharma sector should be increased to Rs 5 crore," suggests Jaishankar.

Undoubtedly, the government has to address the issue and find a solution which can benefit the industry as a whole as well as check revenue losses. As the industry waits anxiously for the government's next move, all sides hope that it will not turn out to be another sugar pill with a bitter after taste.

sushmi.dey@expressindia.com

Source: www.expresspharmaonline.com
24th August 2007

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