Excise duty cut on pharma to benefit Punjab units

States like Punjab which have complained about the migration of pharmaceutical industries to neighbouring tax-exempt states like Himachal Pradesh have reasons to smile.

The government's decision to bring down the excise duty burden on medicines by half has diluted the attractiveness of areas like Baddi in Himachal Pradesh that have witnessed an inflow of pharma manufacturing capacity due to the area-based exemption scheme for hill states.

Immediately after the Budget announcement, the rationale for going to such states has changed and experts say the excise duty cut on drug manufacturing, from 16 to 8 per cent, may even trigger a reverse migration of drug units.

While the decision may prompt Punjab to re-consider its plans to approach the Supreme Court against the tax concessions given to hill states, Himachal Pradesh Chief Minister Prem Kumar Dhumal has expressed shock over the decision.

Welcoming the Budget announcement, Jagdeep Singh, president, Punjab Drug Manufacturers Association, said the government had heeded to a long-standing request of drug makers in non-tax-exempt areas by bringing down the "disparity" they had vis-à-vis their counterparts in tax-exempt states.

"When the tax holiday was granted to Uttarakhand and Himachal Pradesh in 2003, the net tax advantage they had was about 10 per cent. However, the relative disparity was magnified to 30 per cent in January 2005 when the government introduced maximum retail price (MRP)-based excise duty structure for the drug industry. While the MRP-based excise duty system became a deterrent for taxable drug firms to increase the MRP of their medicines at will, this allowed the units in tax-exempt states to increase the MRP and pass on more trade margins to push their products. The decision to cut the excise duties have brought down this disparity," Singh pointed out.

This will bring back drug production to the taxable states where, due to the deterrent factor of MRP-based excise duty, the prices of drugs will remain reasonable, Singh added.

Representatives of the drug industry in Himachal Pradesh feel threatened by the decision, saying 20 per cent of manufacturing may move out of the state due to reduced excise duties.

"The excise duty exemption was the biggest attraction for drug makers to set shop in Himachal Pradesh. Now that the duties have halved, our net cost advantage will come down to about 4 per cent. This will stop further investments in the sector, and may also make companies move out of the state as the cost of manufacturing and transportation charges are much higher in Himachal Pradesh compared to other taxable regions. Our low capacity utilisation with take further hit," said Arun Rawat, general secretary, Baddi-Barotiwalah-Nalagarh Industries Association.

Incidentally, tax-exempt states account for the bulk of India's medicine production. The excise duty cut, therefore, is not going to have any impact on the drug prices.