Alarm over duty hike for small drug firms

The Gujarat branch of the Indian Drug Manufacturers Association (IDMA) has warned that more than half of the small and medium scale pharmaceutical units in the state will be forced to shut shop within a year if the recent notification by the Central government on excise duty is implemented.

Making changes in the form of excise collection from pharmaceutical units, the Central government had on January 7, 2005, issued a notification, seeking to charge a 16 per cent excise duty on the maximum retail price with an abatement of 35 per cent.

This replaces the earlier practice of charging a 16 per cent excise duty on the invoice value or the value at which companies sold goods. Small units, most of which are involved in contract manufacturing, sell drugs at lower profit margins.

According to IDMA, while small scale pharmaceutical companies were in a position to cushion a 16 per cent excise duty on invoice value costs, a 16 per cent excise duty on 65 per cent of the maximum retail price (considering an abatement of 35 per cent) will be impossible to bear for small industries.

While IDMA has already sought an appointment with the ministry of commerce to make a representation in this regard, it is learnt that the Small Scale Indian Drug Manufacturers Association is planning to move the court against the notification.

N C Dalal, president of the Gujarat State Branch of IDMA, while putting the plight of small scale pharmaceutical units in perspective, said: "In short, small scale pharmaceutical players will end up paying about three times more excise than what they were paying until now, a burden that will ensure that they cannot survive."

Dalal added that an IDMA delegation is meeting the Union ministry of commerce officials on January 24 in Delhi to sort out the issue.

Matters are becoming worse for smaller players, as most of them are involved in contract manufacturing for the larger players operating in the state.

With the Central government granting a 10-year excise exemption in Himachal Pradesh, Jharkhand, Uttaranchal and Jammu and Kashmir, about 70 of the total 200 larger pharmaceutical units of Gujarat have already shifted base to these states.

There are about 3,000 small scale pharmaceutical units, and IDMA fears at least half of them will be forced to shut shop because of the move.

It may be stated that many of these units have recently invested between Rs 50 lakh and Rs 1 crore in upgrading their facilities to meet the revised Schedule M guidelines of the Drugs and Cosmetics Act.

IDMA wants the abatement to be more than 50 per cent, so that the companies can continue to survive.

P H Patel, proprietor of the Elite Pharmaceutical, a small scale pharmaceutical unit in Ahmedabad, said: "At present bigger units, with which we have contracts, are moving out to other states where there is no excise duty. With this additional tax, it might be difficult to operate for too long."

R S Joshi, executive secretary of the Gujarat branch of IDMA, said the worst hit will be small scale units of Gujarat and Maharashtra, which account for close to 80 per cent of the country's pharmaceutical production.

"The bigger units will simply discontinue contracts with the smaller units, as they would not want production costs to grow and the smaller units do not have the kind of marketing network and reach to continue surviving," he said.