Indian pharma pads up to fight Republican border tax

Experts claim border adjustment tax would hurt profits, increase healthcare costs

After the swearing in of the 45th US President Donal Trump on Friday, fears of the border adjustment tax (BAT) — proposed by the Republican Party — has again raised its head for Indian pharmaceutical companies.

Republican senators propose to slap a BAT as a tax reform. Under the proposal, US companies would not be taxed for profits from exports. But, manufacturing costs incurred overseas would not be deductible while calculating taxes. Simply put, there would be a tax on imports.

Indian generic drug makers said this would hurt their profitability — but also make healthcare costs higher for US citizens.

For a company shipping drugs from India would include employee costs, research and development costs and manufacturing. These will not be deductible for tax purposes. Costs incurred in the US include marketing and distribution costs plus salaries, and these vary according to products.

“The proposed tax can impact our cash flows and make our business unsustainable,” said a finance head of a Mumbai-based drug maker.

“Our analysis shows that the border adjustment tax in itself could impact the earnings before interest and tax (Ebit) of Indian pharma companies by 17-46 per cent in FY18, assuming proposed 20 per cent tax rate. However if it is implemented and corporate tax rate is retained at 35 per cent, the impact could be as severe as 30-80 per cent of FY18 Ebit,” Bank of America Merrill Lynch analysts wrote in a note to investors.

However, experts are skeptical about the tax proposal going through, given Trump’s earlier opposition to it and also on the impact it will have on drug prices. Trump has termed the border tax as “too complicated”.

The fear of generic drugs getting costlier is another issue.

“We are hoping that imported generic drugs are not taxed. The US government wants to encourage production of generic drugs but it will encourage take at least two years for facilities to develop,” said Indian Drug Manufacturers’ Association President S V Veeramani.

“The Trump administration will be beneficial for the generic industry, specifically ones with a US manufacturing footprint, as he tries to bring down healthcare costs in the United States,” said a Lupin spokesperson.

The pharma industry is also in a wait-and-watch mode, given that there is little clarity on how this tax structure is going to be laid out and whether this would at all cover the generic drug exporters.

“India is a low-cost quality generic drug exporter to the US and what we understand US President Donald Trump’s vision is to incentivise domestic manufacturing, but not at the cost of making drugs expensive in the US,” said the CFO of a leading pharma company with global presence who did not wish to be named.

He, however, also added for the last one year or so Indian companies have already been scouting for manufacturing assets in the US, and now this is set to increase further. Analysts, however, feel higher tax outgo on imports alone will not be a factor shaping acquisitions as cost of labour and manufacturing in US are higher and companies need to factor those costs too.