We don't expect any big changes in on excise duty and custom duty rates, except in life saving drugs.
The pharma sector seeks removal of excise duty on bulk drugs and formulation of anti-AIDS, anti-cancer, anti-TB and other life-saving drugs.
Indian Pharma sector has made rapid strides in both global and domestic market. But the growth pangs were severe for domestic players eyeing greater share of global pie.
The slowdown in generic approvals by USFDA, the payment problems witnessed in a few developing markets since the last quarter and accelerated genericisation and intense competition together meant slower growth in global revenues for the domestic players.
But despite challenging environment, the domestic players continued their consolidation mode and are getting ready for increased CRAMS business from the global majors.
Attracted by enticing business model of the domestic pharma companies, some global players have acquired Indian pharma companies including Ranbaxy Laboratories, Matrix Laboratories etc. Simultaneously, we also witnessed global majors like Pfizer entering deal with domestic players like Aurobindo Pharma and Claris Lifesciences (unlisted) for marketing their generics in the advanced markets.
Likewise, we are also witnessing increase in buy back / open offer for share holders of associates / subsidiaries of the MNC pharma companies. So, the pharma sector is in thick of action. With availability of skilled labour at low cost, India has become favorable destination for most of Multinational companies to manufacture their products and to develop new molecules.
Industry expectations:
Indian Drugs Manufacturers' Association
Excise Duty
- The rate of Central Excise Duty on Pharmaceuticals Formulations of 4% should be continued.
- The Bulk Drugs & Formulations thereof falling under categories of Anti-AIDS, Anti-Cancer, Anti-TB, immune suppressants and other life-saving drugs should be totally exempted from the excise duty.
- Since most of anti-TB drugs are exempted from the Excise duty, Rifampicin should be included in the list of exempted drugs.
- Central Excise duty on Active Pharmaceutical Ingredient (API) covered under Chapter 29 of CE Tariff should be on par with duty on Formulations covered under Chapter 30 of CE Tariff.
- Central Excise duty exemption should be granted for all cases for life saving combo pack formulations.
- All excisable goods used for R & D purposes should be exempted from central excise duty.
- Physician's samples should be exempted from Central Excise duty.
Custom duty
Custom duty & related duties for import of all capital goods, raw materials, consumables & reference standards for R & D purposes should be fully exempted.
Import of Reference standards should be totally exempted from customs Duty, CVD etc.
Organisation of Pharmaceutical Producers of India
- Corporate Tax: Reduce from 33.99% to 30%.
- Tax deducted at Source (TDS) should only be there where there is loan-license and not in respect to goods purchased under contract manufacturing arrangements. Currently, this leads to TDS being computed on the purchase of goods.
- Reduce Dividend Distribution Tax (DDT) to 10% from 16.95% currently.
- Section 32 should be amended to specifically provide for depreciation on goodwill.
- FBT on ESOPs should be withdrawn effective from assessment year 2008-09.
- FBT on Superannuation, medical reimbursement and group insurance premium should be removed going forward. Since the provisions for FBT have been introduced with effect from assessment year 2006-07, the exemption limit of Rs 1 lakh, as introduced by the amendment vide the Finance Act, 2006 should be made applicable w.e.f A.Y. 2006-07.
- Rule 115 may be modified to include the specified date to be considered for conversation of amounts from foreign currency to INR on items on which FBT is levied.
- Seeks introduction of Threshold limit for filing of Accountant's Report under section 92E. Suggests that taxpayers having value of international transaction of less than certain threshold limit (e.g. Rs 1 Crore) can be exempted from determination of Most Appropriate Method ('MAM') and ALP and thus from filing of Accountants report in Form 3CEB.
- Rationalization of Penalty Provisions- To avoid undue hardship to the tax players, the Bombay chamber suggests that the following amendments be made to section 271 AA and Section 271G of the IT ACT: (i)In the event penalty has been levied under section 271 AA, no further penalty should be levied under section 271G. (ii) A cap on penalties may be prescribed, which could be used/ invoked at the discretion of the AO instead of fixed penalty of 2%. (iii) The previsions of Section 273B should be given regard to in case of technical failures and the powers should be utilized more liberally by the authorities. (iv)There should be an upper ceiling (taking into account all penalty provisions on the amount of penalty, i.e Rs 1 crore).
- Purchase of Raw Materials: Appropriate guidelines for the convergence of transfer pricing and customs need to be put in place to find a common ground under transfer pricing and customs as contrary positions are being taken by the respective authorities in arriving at the arm's length price. Further, it is suggested that appropriate adjustments be allowed for the material differences in quality, volume, terms of sale, geographical differences etc. between the controlled and uncontrolled transactions.
- Under Section 24 (b) deduction towards interest on borrowed capital for acquiring a self occupied house property should be increased to Rs 250000 from Rs 150000.
- The maximum exemption available in respect of gratuity paid under section 10 (10) is Rs 350000 and requested to increase it to Rs 500000.
- SEZs- Provide deduction of 100% of profits from export activities instead of deduction available for profits of companies in proportion of export turnover to total turnover.
- Excise duty of 4% on Drugs and Pharmaceuticals should be maintained in the Union Budget 2010-11.
- R & D: Custom duty and services tax should be exemption on the capital investment on R & D centers. The benefited should be restricted to Rs 50 lakhs per year for a unit.
- Cenvat credit on capital goods should be allowed 100% in the year of purchase.
- Rule 9[1][f] of the Cenvat credit rules should be amended to allow Receipts issued by the insurance companies / Port Authorities indicating amount debited towards service tax for the services rendered by them.
- Custom Duty on all life saving medicines like Antibiotics, Anticancer, Anti-HIV etc should be exempted.
- Requested either totally exempt importers from payment of 4% additional duty or reduce the administrative burden associated with processing of such refund claims.
Analysts' expectations
We expect excise duty and custom duty on bulk drugs and formulations of Anti-AIDS, Anti-Caner, Anti-TB and other life saving medicine to be exempted. Currently excise duty on formulation is at 4% and bulk drugs at 8%, which is not likely to be tinkered, except for life saving drugs.
Best Buy/Sell
Exemption in custom duty & Excise duty for life saving drugs would benefits MNC subsidiaries like GlaxoSmithKline Pharma, Pfizer, Novartis, Aventis Pharma etc and domestic companies Dr Reddy's Laboratories, Aurobindo, Cadila Healthcare, Ranbaxy and Sun Pharmaceuticals.
In particular, if excise duty on Rifampicin, a bulk drug for producing anti TB drug, is reduced / removed, it will benefit Lupin, which is a leading producer of this bulk drug.
Outlook
The Indian pharmaceuticals industry has received major relief in the stimulus packages announced between December 2008 and February 2009. As a result of these stimulus packages, excise duty on formulation was cut from 8% to 4% and on bulk drugs from 14% to 8%. We don't expect any big changes in on excise duty and custom duty rates, except in life saving drugs.
By and large such changes will be more beneficial to MNC associates and to some extent to some of the frontline domestic players.