MRP excise duty ruling may impact drug firms

The government's decision to impose excise duty on the maximum retail price (MRP) of all drugs "" which took effect from January 8 "" may have an adverse impact on the domestic operations of drug makers, said analysts.

Till now, pharmaceutical companies used to pay 16 per cent excise duty on the ex-factory price of the medicines. Under the new norms, the companies will be required to pay 16 per cent excise duty on less than 35 per cent of the MRP.

One immediate fallout could be that the drug makers may decide to raise prices of their products to pass on the higher excise duty. However, due to fierce competition in several generic drugs, price increase across the board may not take place.

Alternatively, the pharma companies could also decide to reduce the trade margins in order to pare the outgo on account of excise duty payment.

Yet another scenario is envisaged where Indian pharmaceutical industry is demanding a higher abatement (about 50 per cent less than MRP instead of 35 per cent) to offset the impact of the new norm.

However, the companies which have already shifted their manufacturing bases to excise-exempt zone like Baddi, Uttranchal, Jammu will not be significantly impacted.

"The MRP-based excise along with an abatement of 35 per cent is likely to have an adverse impact on the Indian pharmaceutical market. Leading companies in the Indian pharmaceutical market, both domestic and multinational, outsource a significant portion of their production to save on excise duty wherein, excise was calculated on the cost of production of the contract manufacturer," a Mumbai-based analyst said.

The new norms indicate that irrespective of whether the pharmaceutical company manufactures a product in-house or out-sources it, it will have to pay excise at the rate of 16 per cent on the MRP of the drug after adjusting the abatement.

This implies that pharmaceutical companies will henceforth not be able to save on excise duty by out-sourcing, he added.

Further, the MRP-based excise implies that the manufacturer will have to pay excise duty even on the trade margins, which were quite high for specific drugs.

"Till now the savings on excise duty (due to local out-sourcing) were partly passed on to the trade channels in the form of higher margins," an industry observer pointed out. The actual impact, however, could not be quantified.

Currently, the trade margins in certain generic segments are as high as 500-1000 per cent. Leading Indian pharmaceutical companies, according to analysts, have large exposure to this segment. For instance, Ranbaxy generates about Rs 100 crore in revenues and Cipla about Rs 150- 180 crore.

A company like Nicholas Piramal "" which has not yet shifted to a tax-free zone "" may be impacted to a larger extent compared with companies like Sun Pharma which manufactures a significant portion of its production at excise-free zones.

In case of Ranbaxy, since exports contribute about 85 per cent of the turnover, the impact may not be very significant except for the company's certain generics segment businesses.