Drug formulation sales dip 20-50%

Pharmaceutical companies have taken a hit because of the introduction of the value-addex tax (VAT).

Industry sources said domestic formulation sales of these companies had dipped by 20-50 per cent in the quarter ended March 31, 2005, compared with the sales figure of the same quarter in 2003-2004. That was because of the confusion VAT generated over its implementation, the sources said.

Many stockists have returned formulations to pharmaceutical companies because, according to new guidelines, stocks available as on March 31, 2005, will be taxed under the VAT.

Secondly, the stockists had planned to purchase drugs from companies on a daily basis in order to escape being taxed under the VAT. Even the Centre's assurance of refunds for all formulations taxed under the VAT and sales tax, has not improved matters.

Director, finance, of the Vadodara-based Alembic Ltd Raj Kumar Baheti said: "Alembic has had to face a reduction in formulation sales to the extent of about 20 per cent as a result of ambiguity in the VAT policy."

Baheti's views were echoed by Kamlesh Udani, executive director of Bharuch-based JB Chemicals and Pharmaceuticals Ltd which, too, faced a drop in domestic formulations sales. Udani said implementation of the VAT took its a toll on formulations sales.

Although executives of Ahmedabad-based pharma major Zydus Cadila Healthcare Ltd could not be reached for comment, it is learnt that uncertainties surrounding the VAT have had a considerable impact on its domestic formulation sales.

This, to some extent, explains the lower income and lower net profit posted by the company for the year 2004-05 as compared with those of the previous financial year.

Even Ahmedabad-based Cadila Pharmaceuticals Ltd admitted to suffering losses in the last quarter owing to the VAT. "There was considerable uncertainty over VAT implementation and the company has posted marginally lower domestic formulations sales in the quarter ended March 31, 2005, as compared with the corresponding period of the previous financial year," said a company executive.

It was the same story in states where the VAT did not come in force from April 1, 2005, but at a later date. Sources said in these states, traders were never sure until the last moment whether the VAT was being implemented or not.

In the pre-VAT regime, a one-time sales tax of 8-11 per cent varied from state to state. But, in the post-VAT regime, 4 per cent VAT is charged at every stage of business, including an additional stage where manufacturers purchase formulations from third party producers.