The Hindu Business Line : Painful potions

FOR AN INDUSTRY just grappling with the dynamics of a new product patent regime, the Centre's recent excise duty notification could not have come at a worse time. Last week the Centre announced that the excise duty on finished dosage forms of medicine would be calculated on the Maximum Retail Price (MRP) rather than the ex-factory price. And the decision has let the cat among the pigeons. the decision. <137>

The rationale for the move remains unclear, especially as the Union Budget is just about a month away, and the Value Added Tax (VAT) regime is set to be implemented in April. If the idea of the recent notification is to correct the huge trade margins in the generic drugs business, the objective is unlikely to be achieved by this strategy. For domestic drug-makers and multinational companies will simply stop outsourcing work to smaller units and set up their own production centres in such tax havens as Baddi in Himachal Pradesh,if they do not already have a presence there, that is. So it will be the small-scale industries (SSI) that will take the hit. And government's coffers are not likely to overflow either, what with drug companies taking shelter in the tax havens. Worse, the pharma companies will pass on the excise burden, partly to the trade and partly to the consumer. So, an increase in medicine prices is on the cards.

Further, the drug companies are perplexed at the 35 per cent abatement (that seeks to balance out their expenditure) theyhave been offered. They were hoping for about 60 per cent, given the peculiarities of the pharma industry. They have invested in research, and this would have to be increased if the local drug companies are to survive in the competitive product patent regime. Also, the pharma industry has large trade margins and a facility to return products to manufacturers. This is why the expectations of a higher abatement, since even pan masala, colas and other fast moving consumer goods get about 50 per cent.

The flutter created in the pharma industry could have been avoided had the Centre phased in the unified tax regime under VAT. The last time around VAT was slated to be implemented, a 4 per cent tax rate was expected for medicines. This rate would have combined well with the Government's intentions of having a single point tax that would be printed on the medicine bottles and blister packs. The consumer would have had to pay only what was printed on the package. Political parties that claim to be the conscience-keepers of the government had generated protests across the country when the product patent regime was to be implemented and medicine prices were expected to rise. Either the recent notification has gone unnoticed by these parties or they have been left out of the loop. The interface between the Centre and the drug industry, slated for later this week, will hopefully undo this taxing anomaly. Not so much for the drug companies as for the consumer.

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