Budgetory heat on pharma industry

V S Gokhale

The finance minister, in his budgetary speech on February 27, gave a pat on the back of the Prime Minister's Advisory Council on Trade & Industry when he referred to its recommendations for a knowledge-based industry.

He also intends to strengthen the industry by budgetory measures. Now what are benefits for the pharmaceutical sector?

We can categorise the budgetary proposals under two broad headings: those with an indirect impact on the industry and those impacting directly with monetary effect.

Before evaluating the proposals it would be proper to take a look at the industry's woes.

The pharma sector is is controlled by two ministries. The ministry of chemicals & fertilisers and finance. Many times this causes a delay in getting approvals.

It does not have much significant revenue impact on the government but its ally, the chemical industry has a very significant impact.

Leading in imports - both in terms of quantity and value, and also pays a higher slab of duty at 35 percent.

Under strict price control all acts and omissions of the industry are under regular audit and governance of a third ministry - health.

Many countries use India to dump chemicals at prices lower than domestic tariff and sometimes below cost price. Damage will be total unless anti-dumpting duty is imposed.

Because of these hurdles, it is difficult to manage the industry moreover, the industry also faces stiff competition from MNC's.

A businessman always looks into the budget for what he would gain or lose monetarily. Let us consider a company with a turnover of Rs 100 crore engaged only in formulations.

1. 100 per cent Modvat credit - notification No.22/29 (NT).This could add an additional credit of about Rs 25 to 30 lakh. However, there could be a difference of opinion whether it is additional real gain or restoration of lost gains.

2. Chapter 30 tariff rate increased by one per cent - Section 134-(1)(b)(ii) of bill & fourth schedule serial No 15.

This amendment willincrease the expenses by about Rs 1 crore. It is to be noted that 16 per cent is average rate and not merit rate. Now if we look into tariff it will be seen that;

a) Rate of duty on medicines is equivalent to rate of duty on chewing gum; ice cream; mineral water; paints `perfumed hair oil; paper scrap; colour TV etc.

b) Rate of duty on medicines is more that rate of duty on - branded meat; sugar confectionery; biscuits & cakes ; instant soups, sauces, fruit drinks, pressure cookers clocks etc.

The instant comparison seeks to know and understand the elements to justify the merit and demerits of these rates?

3. Duty on inputs - reduced by two per cent

This will effect in reduction of Modvat credit proportionately, about Rs 1 lakh. As inputs in duty cost has also gone up this reduction in duty will not reduced input cost. This will clearly result in an increase in the cost of production.

4. Withdrawal of five per cent special duty of customs

Practically it is not deleted but addedto basic duty under the guise of reconstructing tariff.

5. Ten percent surcharge on basic

This will increase the input cost by at least one to 1.5 per cent of the basic cost.

6. Erstwhile exempted items under notification No.23/98 continue to be exempt from import duty vide new notification No.20/99 with the exclusion of the earlier 18 items.

7. SSI exemptions

Exemption to branded goods of others if produced in rural areas. It could be quite lucrative considering substantial loan licensee production in the industry. Details are yet to be received.

If we sum up the gains/losses we will see that the Rs 100 crore company will have to spend more about one per cent of turnover. This is the reward of increase in cost, though marginal.

Irrespective of the effect of indirect tax proposals the budget has other bright points for the pharma industry.

Appointment of a committee to review the drug policy.

To allow SSI benefits on branded goods also.

Benefit in income tax toresearch projects.

To increase number of primary health centers in the country.

Still the industry will be justified if it gets further rationalisation in tariff structure by creating a preferential rate or discounts in duty by at least 25 per cent in the following cases:

1. On items listed as "life saving drugs" erstwhile e.g., Metronidazole, Ampicillin, Rifampicin, Cephalexin, Nifidipine etc.

2. On items manufactured by the company which also makes the required bulk drugs.

3. More customs duty on items available locally.

4. No surcharge of customs duty/SAD on items not manufactured locally.

5. On items supplied to primary health centres.

Now onwards the industry is looking forward eagerly towards a new import - export policy with an expectation of good incentives in order to compete in international market by price and quality.

It is sure that the industry will rose to the noble cause as usual, and perform better irrespective of what they get or do not get.

The author is DGM (Commercial) of Alkem Laboratories Ltd, Mumbai.

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