Drug prices likely to rise by 6% due to MRP-based excise

Under the new norms, companies will be required to pay 16 per cent excise duty on less than 35 per cent of the maximum retail price.

The government's decision to impose excise duty on the maximum retail price (MRP) of all drugs, effective from January 8, is likely to result into a 5-6 per cent increase in drug prices (for those not under price control), said Ajay Piramal, chairman of Nicholas Piramal.

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

Under the new norms, companies will be required to pay 16 per cent excise duty on less than 35 per cent of the MRP. The new decision translates into a higher excise duty outgo for drug makers.

"Since pharmaceutical companies will not be in a position to absorb the impact in terms of an increase in cost, the burden to some extent has to be passed on to the consumer," Piramal pointed out today.

According to him, although it is a move in the right direction, the abetment should have been at least 50 per cent. Heavy expenses incurred by companies on account of marketing and research & development activities have not been factored in while taking the decision.

"It is likely that drug prices across several categories will increase by 5-6 per cent. The prices of controlled drugs will remain unchanged," he added. An across the board (uncontrolled) drug price increase is, however, not possible due to a fierce competition in several generic drugs.

Pharmaceutical companies are also looking at reducing trade margins to pare the outgo on account of excise duty payment as the MRP-based excise implies that the manufacturer will have to pay excise duty even on trade margins, which are as high as 500 per cent and even more in case of certain drugs.

According to analysts, companies, which have shifted their manufacturing bases to excise-exempt zone such as Baddi, Uttranchal, Jammu, will not be significantly impacted.