Why India's pharma cos prefer Gujarat over tax havens

Gujarat has around 3,000 licensees for allopathic drug manufacturing, apart from around seven homeopathic licensees, 500 ayuvedic and 600-700 cosmetics licensees

The Goods and Services Tax (GST) has proven to be a boon for the pharmaceutical industry in Gujarat, with a renewed interest among pharma companies to set up units here as the hilly states tax havens lose attractiveness.

As per the local Food and Drug Control Administration (FDCA), they are handling 30-40 applications every week for brownfield and greenfield units since GST has been implemented, as against 10-12 per week earlier.

H G Koshia, commissioner, Gujarat FDCA, informed that data collected for the period between June 13 and September 12 shows that around 56 fresh proposals to set up pharmaceutical manufacturing units have come in during this period.

This apart, another 100-120 proposals have come in for expansion at existing units or brownfield expansion. These are mainly small- and medium-sized units and the total investment is estimated to be around Rs 600-650 crore (Rs 6-6.5 billion).

Gujarat contributes to around 33 per cent of the national pharmaceutical production, and this share is expected to move up to 40 per cent by 2020, feels the Indian Drug Manufacturers Association (IDMA).

GST was implemented from July 1. This has largely reduced the attractiveness of setting up industries in tax havens of hilly states.

While the Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, has given approval to the scheme of providing Budgetary Support under the GST regime for the eligible industrial units locations in Jammu and Kashmir, Uttarakhand, Himachal Pradesh and North Eastern states, including Sikkim till 2027, the same applies to the existing units and involves a refund mechanism.

The support of Rs 27,413 crore (Rs 274.13 billion) will be available for the residual period (10 years from date of the commercial production) in these states and would be restricted to the central share of the cash component of CGST and IGST paid by the affected eligible industrial units.

It is estimated that a total number of 4,284 units located in these tax havens will benefit from the scheme.

However, when it comes to fresh investments in greenfield units, these states thus lose out on the competitive advantage vis-a-vis the established pharma manufacturing hubs like Gujarat and Maharashtra.

Viranchi Shah, chairman, IDMA - Gujarat State Board, explained that under the current tax structure contract, manufacturing units (40-45 per cent of the domestic pharma production comes from contract manufacturing) will benefit.

“Let’s assume one has an input cost of Rs 100 (this includes packing material, bulk drugs, capsules etc which are taxed at different rates), he will roughly pay a tax of 18 per cent, or Rs 18 on the inputs.

"The manufacturer then value-adds on the input and let us assume this amount is around Rs 50, then the final product is priced at Rs 150.

"At 12 per cent rate, tax on this also comes at around Rs 18. Now, this manufacturer is also claiming input tax credit on the tax paid on input or purchases. This reduces his overall tax burden significantly.”

Input tax credit basically means that at the time of paying tax on output, one can reduce the tax one has already paid on inputs.

Shah feels that in the contract manufacturing space, value addition or markup is hardly ever over 50 per cent.

“There are not many products where you can value-add more than 50 per cent of your input cost. On an average, 30-40 per cent value addition is done,” he said.

Considering the existing hubs like Gujarat and Maharashtra have the skilled manpower, and in an uniform tax regime, these hubs would become more popular among pharma companies, especially contract manufacturers.

The industrial town of Baddi in Himachal Pradesh had attracted several pharmaceutical units after the subsidy scheme was announced in 2003.

According to market estimates, around 360 pharma units had set up shop in the state, attracted by the tax incentives.

At least 50-60 small, mid-sized and big pharma from Gujarat had moved to Himachal, Uttarakhand and Sikkim to avail the incentives during the period that included Alembic Pharma, Torrent Pharma, among others.

Interestingly, Maharashtra has not seen a similar surge in applications like Gujarat.

A senior official in the Maharashtra Food and Drug Administration said that things have not seen any increased momentum since GST implementation.

“We are hopeful that pharmaceutical industry will shift it’s manufacturing base to Maharashtra after implementation of the GST but we are yet to receive fresh proposals,” said a senior FDA official from the state.

Shah felt that this might be because a lot of Maharashtra based companies and even new ones prefer to set up units in parts of Gujarat that border Maharashtra like Vapi, Valsad, Ankleshwar, etc as the land costs are relatively lower and also these areas are close to existing bulk drug hubs of Bharuch and Ankleshwar.

“This might be the reason behind Gujarat witnessing a surge in applications while Maharashtra has not experienced any spurt,” he said.

Gujarat is also planning to set up a pharmaceutical park in its flagship industrial hub Sanand, about 30 odd km from Ahmedabad under the Cluster Development Programme of the Centre.

Already around 50 hectares of land has been identified.

As such, Gujarat has around 3,000 licensees for allopathic drug manufacturing, apart from around seven homeopathic licensees, 500 ayuvedic and 600-700 cosmetics licensees, Koshia informed.

This, however, does not represent the number of units as one unit at times has multiple licenses for different categories of products. Overall, there are around 1,200 drug manufacturing units in Gujarat.

In contrast, Maharashtra has around 890 pharmaceutical manufacturing units. Gujarat has the maximum number of WHO-GMP certified manufacturers in the country at 280. Maharashtra is close behind at 222.

Photograph: Reuters.