According to The Pharmaceutical Manufacturers' Association of Tamil Nadu, the formulations industry would see its export turnover of Rs 2720 crore fall by 50 per cent. The bulk drug industry which utilises 40 to 50 per cent of its production (directly or through sales to domestic manufacturers who export), will also see a drop of 25 per cent in their offtake six months down the line, the association predicted.

Exporters in the past year opted for the DEPB route for exports introduced by P Chidambaram rather than the advance license route. The DEPB credit was worked out for formulations in a manner to bring about parity between domestic bulk drug prices and international prices. Consumption of local bulk drugs for exports increased, thanks to the scheme. The DEPB route had also simplified procedures of the previously existing pass-book andexports were considerably facilitated. See table for export growth.

The DEPB had also brought in a clause under Serial no 40, that fixed single rates of credit for tablets and capsules - 15 per cent, injectibles - 9 per cent, syrups - 11 per cent, irrespective of permutations and combinations, wiping out ambiguities during calculation.

The new DEPB has scrapped Sl no 40 and thrown open the doors to the confusion of yore. Sl no 37 ( substituted for Sl no 40) now states that credit is available for formulations at 75 per cent of the DEPB rates fixed for just 62 bulk drugs notified in the scheme.

If a bulk drug is given a DEPB rate of 20 per cent (for say paracetamol), then formulations of paracetamol for exports will be entitled to 75 per cent of 20, which would amount to 15 per cent. Of 2000 pharmaceutical products currently exported, the industry will lose its competitive edge in the balance 1948 products due to the limited listing.

Greater confusion lies in store for combination drugs. If there arethree ingredients in a formulation and two are entitled for DEPB credit, will the credit be given or will it be dismissed on the ground of the third component? Even assuming that all the ingredients are allowed for DEPB, there would still be differences of opinion between the manufacturer, the Customs and finally the DGFT on computation of credit - giving rise to disputes and backlogs of payment.

One way of calculation would be - taking the mean average of the rate of various bulk drugs used with 75 per cent of duty entitlement. Suppose paracetamol and ibuprofen are used in a tablet, then the DEPB rate of paracetamol (say 20 per cent) along with the DEPB rate of ibuprofen (say 10 per cent) is added and divided by two for a mean average. The final formulation is entitled to 75 per cent of 15 per cent mean.

On the other hand, Customs could also calculate duty entitlement in proportion of each ingredient going into the formulated product say, a paracetamol 75 per cent + Ibuprofen 25 per cent combination.This would add to the complications, that may be further compounded by DGFT which may have thought of something else.

Before Sl 40 came into being, similar anomalies resulted in a backlog of overdues in Chennai Customs estimated at Rs 15 crore for pharmaceutical products alone.

The scrapping of Sl 40 takes manufacturers back to those days where a tug-of-war was always inevitable in the Customs House with companies deputing several personnel for this purpose alone.

The direct fallout would be that manufacturers of formulations would now opt to import under advance licence instead of buying from local manufacturers. This was not a favoured route before because imports had to be made in bulk (no control over inventory). The procedure for getting the DEC (Duty Exemption Certificate) is very cumbersome, with at least six interdepartmental clearances, which sometimes takes twelve months or more for any single item. (No wonder companies were given 18 months to fulfill export obligations under advance licence).The government inevitably loses money as the time lag makes it difficult to monitor exports.

Costs are bound to soar because of the scrapping of Sl no 40. Small industries which form more than 60 per cent of exporters expect costs to go up by more than 6 to 8 per cent for additional inventories, paper work, increase on LC charges, and clearance charges, etc. This is bound to render them uncompetitive. India has been able to export on the strength of costs in the face of competition from China and South Asian countries.

Also many companies which had booked orders months ago through tenders are suddenly finding their quoted prices unviable. They must choose between booking losses, or coughing up 10 per cent penal charges for failed contracts and even losing the customer.