The Hindu Business Line : One year up: FBT chips away at drug companies' profits

There is a lot of administrative work involved to maintain records and there is no clarity on how physician samples will be treated, says the official.

Mumbai , Jan. 12

PROMOTIONS and field-force are inherent to the way pharmaceutical companies do their business. So naturally, drug companies are finding it difficult to live with fringe benefit tax (FBT) that targets the "collective" perks enjoyed by employees.

In its first year, FBT has chipped away at the bottomline of drug companies, say representatives whose companies have to draw the fine line between expenses for business promotion and perks. This was in addition to increasing the onus of documentation on companies and adding to their costs, the officials say.

Confusion: Despite the clarification post-Budget 2005, there is still a lot of confusion, says Mr N. Santhanam, Chief Financial Officer of Nicholas Piramal India Ltd. FBT has shorn off about Rs 2 crore from the company's profits, he admits.

Although the rigour of FBT had been softened for pharma companies, as compared to FMCG (fast-moving consumer goods) for instance, it still takes its toll, he says. There is a lot of administrative work involved to maintain records and there is no clarity on how physician samples will be treated, says the official. NPIL has a standalone field-force of 3,000-plus personnel, touted to be among the largest in the domestic pharma industry.

Mr Kewal Handa, Managing Director with Pfizer in India says that drug companies spend up to 15 per cent of sales on promotional-meetings, doctor interfaces, detailing aids etc. FBT will affect the profit of companies, he concurs. The impact will be further felt during the actual assessment, he points out.

Industry representatives also worry about the interpretative nature of the norm and the discretionary powers given to tax officials. Instead of giving with one hand and taking it away with the other, the government would do well to simply increase corporate tax and scrap FBT, says a topofficial with a drug company.

Legitimate expenses: Ipca Labs' Executive Director-Finance, Mr A.K. Jain, points out that sales promotions and travel are legitimate business expenses. Companies will be forced to contest and litigate if tax officials do not interpret the FBT as companies do. Ipca has taken a Rs 1.5-crore hit on its profits, he says.

FBT has eroded about Rs 6 crore from Cipla's bottomline, says Mr S. Radhakrishnanm, Chief Financial Officer. Cipla has a 2,500-strong field force and documentation is something that they have come to live with, he says.

The Indian Pharmaceutical Alliance, representing several large domestic drug companies, pointed out that it was difficult to isolate the personal element in the collective benefits. "This is so especially where the expenditure incurred by the employer is ostensibly for purpose of the business but includes, in partial measure, a benefit of a personal nature," the IPA said in its proposal for the forthcoming budget.

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