C.R. Sukumar

Hyderabad, March 21

HYDERABAD may soon have to forego its coveted title of pharmaceutical capital of India. More than 150 pharmaceutical formulation units in Andhra Pradesh are expected to shift operations to the tax-exempted States such as Himachal Pradesh, Uttaranchal and Jammu and Kashmir soon, the Confederation of Indian Industry (CII) has pointed out in its latest economic update.

Interestingly, it is not just the small and medium pharma companies alone that were in the process of shifting their base, leading pharma majors such as Dr Reddy's Laboratories, Aurobindo Pharma and a host of others have also purchased land and were currently in the process of creating facilities, it said.

"This flight of investment from Andhra Pradesh to any of these States will wipe out the formulation industry from the State and will result in the consequent loss of State revenue and employment opportunities. Great majority in the sector are contract manufacturers," the economic update pointed out.

According to the industry body, the current exodus of formulation units from AP was mainly triggered by the Government stand on MRP-based excise duty.

The Central Government through a notification dated January 7 this year levied central excise duty on retail price of medicines instead of hitherto practiced norm of payment of central excise duty on ex-factory price.

"At the same time, the States like Jammu & Kashmir, Uttaranchal and Himachal Pradesh are providing total exemption on central excise for 10 years from the date of first invoice along with waiver of sales tax and income tax," the Confederation said.

CII has pointed out that these tax exemptions being offered by these three States amounted to 25 per cent to 30 per cent benefit to those pharma companies that shift their activities to any one of these States.

"In other words, even if someone puts a new factory, he will recoup the entire expenditure within three years. The remaining seven years is free."

When contacted, the Dr Reddy's Labs spokesperson admitted that the company has purchased land in Himachal Pradesh to set up a formulation unit and that the project was currently underway. However, he said the company's decision to set up unit in Himachal Pradesh was not triggered by the MRP-based excise duty.

"It may now turn out to be a spin-off benefit to us. We planned the facility in Himachal Pradesh much before the MRP-based excise duty was announced. It has been one of our stated policies to leverage on the fiscal incentives of Government whenever we go in for expansion of production facilities. Accordingly, in the last couple of years, we had moved over to the special economic zones of Goa and Yanam for formulations facilities," he said.

According to a representative of the Confederation of Indian Pharmaceutical Industry, owing to new MRP-based excise duty, a large number of pharma units, especially in the SSI sector, had cut down their production activities by more than 50 per cent in the last couple of months.

A number of them were cancelling their contract manufacturing agreements.

(This article was published in the Business Line print edition dated March 22, 2005)
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