Small pharma units may lose contracts

New excise duty norms for drugs a blow to outsourcing

Over 3200 small scale pharma units in Gujarat may lose their contract manufacturing orders on account of the government's decision to impose excise duty on the maximum retail price of drugs.

The new norms, which came into effect from January 8, 2005, indicate that irrespective of whether the pharmaceutical company manufactures a product in-house or outsources it, it will have to pay excise at the rate of 16 per cent on the MRP of the drug after adjusting the abatement of 35 per cent.

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

Till now, pharmaceutical companies used to pay 16 per cent excise duty on the ex-factory price of the medicines.

"The small pharma units lacks the marketing muscle, most of these units are into contract manufacturing. Once the multinational corporations find that there will be no transfer price advantage for them, they will stop giving business to the small units and instead expand their own capacities," said Ashwin Shah, president, Rakanpur-Santej Pharma Manufacturers' Association, on Friday.

To protest the government move, owners of small pharma manufacturers have undertaken a five-day token fast and organised a protest dharna in Ahmedabad.

"By any standard the proposed excise duty (16 per cent) is exorbitant for an essential commodity like medicines. To promote healthy competition among various categories of drug manufacturers, we are representing to the finance minister to return to the old transfer value based excise system or reduce excise duty to eight per cent on drugs under the MRP-based excise system," Shah added.

In addition, with the government declaring states like Himachal Pradesh, Uttranchal, Jharkhand and Chattishgarh as tax free zones, pharma majors like Alembic, Cadila, Intas Pharmaceuticals, Torrent Pharmaceuticals, Sun Pharmaceuticals and Paras Pharmaceuticals have already started moving out of Gujarat.

"Due to the cost advantage for units situated in excise free zones, small drug manufacturers of Gujarat and other parts of the country have no option but to close down. This will lead to large scale unemployment, waste of infrastructure and irrecoverable bad debts. At the same time, medicines will become higher," said Kaushik Patel, director, Jaywin Remedies and committee member of Indian Drug Manufacturers' Association.