Pharma sector wants govt to cut excise duty on bulk drugs to 4%

Pharmaceuticals industry in India is growing at stronger pace after the marginal slow down due to global economic conditions. Industry witnessing strong growth in both domestic and exports markets too. Domestic market for the first nine months of current fiscal has grown 17.2%.

Meanwhile, the domestic pharma industry is in the consolidation mode in the last 18 months. The consolidation started with Daiichi Sankyo's acquisition of majority stake in Indian Pharma majors Ranbaxy Laboratories. Recently, Orchid has sold his generic injectable business to Hospira.

With poor output from R & D Pipeline, MNCs players are looking to cut down their costs to maintain profits. The big global pharma players are shutting down their high costs manufacturing facilities and outsourcing their manufacturing pipelines to BRIC countries in general and India in particular.

So the demand for CRAMS business has started picking up. At the same time, they are also entering into generic business segment by tie up with low manufacturing countries as block buster drugs worth of USD 100 billion are expected to come out of patent in the next five years.

For Instance, Pfizer-Aurobindo, GlaxoSmithKline-Dr Reddy's Laboratories and Pfizer-Strides Arcolab have signed agreement to generic product. Former will be supplying the drugs and later will be manufacturing the products.

Current duty structure

Industry expectations

Direct Taxes

Hike Weight deduction on R & D

Weighted deduction is available to a company engaged in the business of biotechnology or in the business of manufacture or production of, inter-alia, any drugs or pharmaceuticals, on Research & Development expenditure incurred upto 31st March 2012. Further, the weighted deduction is available only for expenditure on in-house facility.

Issue

The pharmaceutical research is a lengthy, risky and expensive. (i) The current benefits were not allowed to companies engaged in the business of R & D and contract manufacturing. (ii) The existing provision do not specify as to whether the expenditure incurred outside the R & D units such as expenses on overseas trials, preparation of dossiers, consulting/ legal fees for filings in USA for New chemicals entities (NCE) are eligible for weighted deduction.

Accordingly such expenditure does not qualify for weight deduction. (iii) Domestic companies incur substantial costs in defending their patent rights and applications in and outside India and these sums are not eligible for deduction. (iv) The present provisions do not specify as to whether the expenditure (on R & D) approved by Department of Scientific and Industrial Research is eligible for weight deduction or the entire expenditure on R & D facility approved by Department of Scientific and Industrial Research (DSIR) is eligible for weight deduction (v) The weight deduction is not available in respect of expenditure on land and building.

Suggestions

• Increase weight deduction from current levels of 150% to atleast 200 to 300% levels
• Extend weight deduction benefits to the companies business of R & D and Contract manufacturing
• The weighted deduction should be extended for expenses incurred outside the R & D facility, as these are necessitated by current business needs of the industry.
• Clinical trials carried out in approved hospitals and institutions by non-manufacturing firms to be covered within the ambit of expenditure eligible for weighted deduction. 
• Companies engaged in R & D activity do not get weighted deduction in respect of expenditure not approved by DSIR though the R & D facility is an approved one. So government needs to clarify existing provisions whether only approved expenditure is eligible for weight deduction, or the entire expenditure in the approved R & D facility is eligible for weighted deduction.
• The pharmaceuticals companies need state of the art facilities. Several leading companies carry out the research at the locations exclusively designated for the purpose. Therefore, it is imperative such companies are also granted the weighted deduction on the expenditure incurred on land and building.

Indirect taxes:

Customs duty

Customs duty on life saving drugs should be exempted

In the Budget 2009-10, basic customs duty on certain drugs (and bulk drugs for their manufacture)/vaccines has been reduced from 10% to 5%. Further these drugs have also been exempted from the excise duty/ additional customs duty. Also, for certain medical devices the customs duty has been reduced from 7.5% to 5% with a concurrent reduction in excise/ additional customs duty to Nil.

Custom duty on formulations is 10% (other than specified drugs, life saving drugs, vaccine and bulk drugs for which the basic customs duty rate is 5%)

Issue

Life saving drugs will be available to the patients at reduced prices, which will help in bringing down the cost of treatment for these ailments. Reduction in import duty on medical would overall reduce the cost of treatment of patients and help in making available the best medical facility in India at relatively cheaper rates.

Suggestion

• Custom duty on all life saving drugs should be exempted from custom duty.
• Reduce custom duty on all medical devices to 5% and life saving devices should be exempted from custom duty.
• Reduce custom duty on formulation can be decreased to 5%.
• Continue custom duty on Bulk drugs at 7.5%.
• Drugs come under "Interferon alpha" segment are considered as life saving drugs and exempted from customs duty. In the same, Interferon beta-1b, Pegylated Liposomal Doxorubicin Injection & Doxorubicin and Doxorubicin Hydrochloride Liposomal injection are need to added in life saving drugs. All these drugs should exempt from Customs.
• Import of all capital Goods, Raw materials, consumables & Reference standards for R & D purposes should be fully exempted from customs duty & other related duties.

Excise Duty

Issues

The current excise duty on formulation is at 4% (plus 3% cess) and APIs is at 8% (plus 3% cess). This results in accumulation of CENVAT credit in the books of manufactures especially those who are not engaged in exports and cater only to the domestic market. There is blockage of funds as well.

Vide Notification no 49/2008 CE dated 24th December 2008 an abatement of 35% allowed on Medicaments while calculating the assessable value for the purpose of excise duty calculation. As per section 4A of the central excise act 1944, an abatement of 35% allowed for the purpose of levying excise duty on Pharmaceuticals. Current abatement does not cover the trade margins and the value of R & D costs and other costs associated with the pharma industry such as distribution of many medicines through "cold chain" have increase in the recent times.    

Under SSI exemption scheme, the eligibility limit of value of clearances in the proceeding year has been increased from Rs 3 crore to Rs 4 crore with respective 1 April 05. The exemption lime was increased to from Rs 1 crore to Rs 1.50 crore with respective to 1 April 07.

The cost of carrying R & D is substantially higher for global pharma players than Indian Companies. India is emerging as hub for collaborative and outsourced R & D. And Indian companies need to change their business model from business driven research-to-research driven business.  

Suggestion

• Continue 4% excise duty for pharmaceutical formulations
• Reduce Excise duty from 8% to 4% for pharmaceutical APIs
• Increase abatement to 45% from current 35% due to increase in costs.
• As SSI sector contributes significantly to the National Economy, the eligibility limit should be increased to Rs 5 crore from present limit of Rs 4 crore and exemption limit should be increased to Rs 2 crore from the present limit of Rs 1.50 crore.
• Considering the long-term benefits of R & D to the economy at large, all excisable goods used for R & D purposes, should be exempted from Central Excise duty.

Analyst Expectation

We expect excise duty and custom duty on life saving drugs and medical equipment exempted. On other hand, excise duty is set to increase, especially on formulations. Government can also consider the increase in the weighted deduction on R & D to 200% from current 150%.  

Drugs which come under "Interferon Beta" can be added to life saving drugs as Interferon alpha drugs. In the same way, the injections like Pegylated Liposomal Doxorubicin injection and Doxorubicin Hydrochloride Liposomal injection which are used for cancer treatment are also expected to add in the life saving drugs list.

Scrip's to watch

In interferon segments, the companies like Cadila Healthcare, Glenmark Labs, and Piramal healthcare are key players in the segment. If the product in interferon beta segment is added to life saving drugs these companies would benefit.

If the Excise duty is increased 2% across the board, there will not have any big negative impact on the sector but the MNCs players like GlaxoSmithKline, Pfizer, Novartis may have marginal impact.

Outlook

Indian Pharmaceuticals industry is steady growing over five years. Despite of recession, the pharma exports have grown by 29%. We don't expect any big changes from union budget except addition of few drugs in life saving list, and general hike in excise duties. Overall, union budget will be neutral on pharmaceutical industry.