Excise squeeze on contract drug units

Move to restrict tax break to self-manufacturers.

The chemicals and petrochemicals ministry is moving a proposal to crack down on contract manufacturing of pharmaceuticals in zero-excise pockets of the country such as in Himachal Pradesh and Uttaranchal.

The proposal seeks to confine the benefit to only those units that manufacture for themselves. "An increasing number of firms in Baddi in Himachal Pradesh and places in Uttarachal are advertising for and undertaking contract manufacturing for bigger Indian companies and multinationals, even as small and medium scale companies in other parts of the country are faced with the possibility of closure," said an official of the chemicals and petrochemicals ministry, the administrative ministry for pharmaceuticals.

The situation has been accentuated by the government's move in January 2005 to levy excise on the maximum retail price (MRP). When it was levied on the ex-factory price, it made sense for pharmaceutical companies to outsource the manufacturing, buy at low prices and sell to retailers at much higher prices, allowing hefty margins for both.

In a highly fragmented and competitive market like India ""which has over 20,000 pharmaceutical companies and 80-100 brands chasing every molecule ""this was a blessing for companies. The move to MRP-based excise was viewed as a big threat to outsourcing.

However, the contract manufacturers subsequently shifted to zero-excise pockets. Thus, a large number of small and medium companies""whose number is estimated by an industry association at 5,500 ""suffers cost disadvantages as the big firms outsource to the excise-free zones.

According to the official, the ministry's concerns have been echoed by the ministry of small scale industries and the two will together take this up with the finance ministry.

Industry associations like India Drug Manufacturers' Association (IDMA) and the Confederation of Indian Pharmaceutical Industry (CIPI) have already raised the issue.

The chief ministers of Gujarat, Andhra Pradesh and Punjab, too, are believed to have written to the finance ministry about it. According to the official, the issue could have been addressed by reducing the excise rate from 16 per cent to 8 per cent, or by enhancing the excise exemption limit for small scale units to Rs 5 crore from Rs 1 crore.

The first would have reduced the arbitrage sharply and the second would have brought immense relief to units in all parts of the country. However, neither happened in this year's Budget. "With neither happening in the Budget, we are considering keeping third party manufacturing out of the zero-excise benefits ambit," explained the ministry official.

"We have written to the government about it. We either leave for Baddi or lose the contracts.... what will happen to the infrastructure created and labour in other parts? For a level playing field, the same benefits should be handed out to pharma clusters in Gujarat and Maharashtra too," said Daara Patel, secretary-general, IDMA.