The Hindu Business Line : Gujarat pharma sector fears SME exodus to tax haven States

Even as pharmaceutical major Zydus-Cadila has started work on Pharmez, the special economic zone (SEZ) exclusively for pharma industry here, the pharma sector in Gujarat is fearing an exodus of small and medium enterprises (SMEs) to some of the northern States that offer exemption from income-tax and excise duty for 10 years, and has urged the Centre to rationalise its tax policy to save the sector from a "textile sector-like death".

Gujarat produces pharmaceutical products worth about Rs 15,000 crore per annum, including the 2,000-odd loan-licensees and contract manufacturers' share to the tune of about Rs 7,000 crore. If the present Central policies continue, Gujarat is likely to lose this entire Rs 7,000-crore drug production in the near future, according to the Indian Drug Manufacturers' Association (IDMA).

Already, more than 650 SME pharma units, out of about 3,500, have migrated to the tax haven States such as Himachal Pradesh, Uttaranchal, Jharkhand and Jammu and Kashmir, during the last couple of years, according to Mr N.C. Dalal, Chairman of IDMA's Gujarat State Board. "Due to closure of most of its textile mills during the last few decades, Ahmedabad no longer remained `the Manchester of the East'; similarly, Gujarat, which contributes about 40 per cent of the total pharmaceutical drug production in India, would not remain the nation's second pharma hub after Maharashtra if the Centre failed to take immediate measures," he told Business Line here.

He said some other States were also facing similar migration of pharma industries to the no-tax States.

In a memorandum to the Prime Minister Manmohan Singh in April this year, the IDMA had urged the Centre to reduce excise duty on pharmaceutical products from 16 per cent to eight per cent, so as to make prices more competitive, provide a level-playing field to units in the States other than the no-tax ones, and increase in the exemption limit of excise for small-scale units from the present turnover of Rs 1 crore to Rs 5 crore.

On the one hand, the Centre had offered tax sops to the export-oriented SEZs and also to the tax haven States for their development, it has, on the other hand, adopted "discriminatory" tax policy towards existing pharma companies in other States that could kill them. If the existing companies close down, prices would escalate and the Government's own objective of `health for all' would be seriously compromised, he maintained.

The IDMA Executive Secretary, Dr R.S. Joshi, said the Union Finance Ministry's decision of not granting sops to the pharmaceutical manufacturing industry has pushed more than 2,000 contract manufacturing and loan-licensed pharma units in Gujarat on the verge of closure.

Most of the nearly 1,750 loan-licensed units in Gujarat have either reduced their production drastically or are in the process of downing their shutters. He said some of these units were barely surviving by curtailing production to half, with up to only three days' week of production and by other cost-cutting measures like reducing working hours due to lack of adequate orders or contracts.

These units were surviving only due to contract manufacturing works offered by large-scale Indian companies and major multinational pharmaceutical companies for an extended period of about six months until their pharma units coming up in the excise-free zones become functional.

Once this period is over, many a unit with quality manufacturing facilities are bracing to take off to the excise-free areas.

Many companies had informed the manufacturers their unwillingness to issue further orders unless the units relocated to tax-free areas.

In a memorandum to the Finance Minister, Mr P. Chidambaram, in March last year, the IDMA had described the MRP-based excise duty as "unhealthy competition adversely affecting the drug industry". It said 90 per cent of the drug manufacturers market their product through franchisee or contract marketing system or doing job work for other large companies.

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