Cure or Care?

INDIRECT TAXEX/ POLICY

Duty rates of drugs and cosmectic cause heartburn

One of the continuing controversies in respect of charging indirect taxes such as customs and excise duties is about the different rates of duty for drugs and medicines on the one hand and cosmetics on the other hand. The basic thesis is that while cosmetics are used by the richer class, medicines are used by the poorer class as well.

Historically the customs duty on cosmetics used to be very high almost in the region of 100 per cent. Gradually it has come down to 30 per cent. Medicines on the other hand attract the customs duty of 12.5 per cent. In central excise, the duties have been made 16 per cent for both but due to various exemptions for different types of medicines, the need to distinguish between medicine and cosmetics still continues.

Even if the excise duties become the same, the distinction still will have to be made for the purpose of levying customs duty and the countervailing duty which is equal to the excise duty. Therefore so long as the exemptions remain in excise and the customs duties are different, the distinction between cosmetics and medicines will continue to be a matter of contention.

The distinction has not been codified in spite of several judgements by the Supreme Court and the High Courts on the issue. The judicial pronouncements have not been able to give a very specific definition of medicines and cosmetics mainly because they have overlapping uses. Cosmetics are generally considered as falling under four main heads: (1) decorative ones, e.g. nail enamel, hair lacquer, lipstick, (2) corrective ones e.g. light face powder, rouge, (3) protective ones e.g. day cream, heavy face powder, (4) curative or therapeutic ones, e.g. anti-perspirants, hair preparations.

In a famous judgement in a case of B.P.L. Pharmaceuticals Ltd. Vs. Collector of C. Excise, 1995(77) ELT 485 (SC), the Supreme Court went elaborately into various aspects of the use of an anti dandruff preparation known as 'Selsun' and observed that the basis for the distinction should be on the basis of definition given in the Drugs and Cosmetics Act 1940.

On the perusal of the definition the Supreme Court broadly distinguished cosmetics and drugs as follows:

"A 'Cosmetic' means any article intended to be rubbed, poured, sprinkled or sprayed on, or introduced into, or otherwise applied to the human body or any part thereof for cleansing, beautifying, promoting attractiveness, or altering the appearance, and includes any article intended for use as a component of cosmetic." And

"A 'Drug' includes all medicines for internal or external use of human beings or animals and all substances intended to be used for or in the diagnosis, treatments, mitigation or prevention of any disease or disorder in human being or animals, including preparations applied on human body for the purpose of repelling insects,

However, while applying the definitions to individual items like Selsun, the question that arises is that while it is basically medicine, it is used as a shampoo which is normally a cosmetic. The Supreme Court, held that there are several considerations, which are the following: (i) How is it understood in the common parlance? (ii) What's more, the therapeutic quality or the quality for beautifying, cleansing, and promoting attractiveness? (iii) Are they available with or without prescription?

All the above criteria are subject to controversy. The common parlance criterion involves making enquiry in the market but that also becomes vague if opinions given by shopkeepers and users differ. The predominant quality is often subject to chemical testing. Availability with the prescription is not always clinching evidence.

The issue is basically to distinguish between cure and care. Since they overlap, the controversy will continue till the rates of duty both in customs and excise are made equalwhich is a far cry.