Budget has no good news for pharma sector

Budget provisions:

Excise duty on formulations has increased from 4 per cent to 5 per cent.

Imposed MAT on developers of Special Economic Zones as well as units operating in SEZs.

Minimum Alternate Tax (MAT) has been increased to 18.5% of book profits from 18%.

Customs duty on four specified life saving drugs and their bulk drugs is reduced from 10% to 5% with Nil CVD (by way of excise duty exemption).

Basic customs duty on lactose for use in manufacture of homeopathic medicines is reduced from 25% to 10%.

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Industry expectations - not fulfilled

Custom duty on all life saving drugs should be exempted from custom duty - not fulfilled.

Reduce custom duty on formulation can be decreased to 5% - not fulfilled.

The excise duty rate of APIs should be reduced from 10% to 4% to make it at par with formulations - not fulfilled.

The abatement on excise duty should be increased to 45% from the current 35% to cover-up the trade margins etc - not fulfilled.

Benefits should be provided to the business units engaged in the business units of R&D and contract manufacturing in the form of tax credits, which can be used to offset future tax liability - not fulfilled.

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Budget imact:

On a relative basis, the marginal increase in excise duty on formulations from 4% to 5% will impact MNC pharma companies more than the domestic frontline pharma companies, as the share of domestic sale in the total sale of the former are significantly higher.

However, these hikes are likely to be passed on.

If the player is producing / procuring formulations from Excise free zones, the possibility of them priced equal to excise levied other zones are higher, leading to further improvement in the profitability and popularity of excise free zones.

Also, now, the differential between excise duty on bulk drug (10%) and formulations (5%, and 3.25% net of 35% abatement) has slightly narrowed down, and has brought down the under recovery of excise duties in respect of formulations, especially where the value addition from bulk drug stage is lower.

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Hitherto, value addition at 207.69% was required to ensure that the excise duty on bulk drugs at 10% is fully recovered by excise duty on formulation sales if the formulation is sold at 384.62 (including value addition, assuming 100 as bulk drug cost) with excise duty levied at 2.6% (4% with 35% abatement).

Now the minimum value addition required will come down to 207.69, so that the excise duty at 10% on 100 is equal to excise duty on 306.69 at 5% with 35% abatement.

In addition, MAT on developers of Special Economic Zones as well as units operating in SEZs indirectly hurt the growth of industry.

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Scrip to watch

Lupin, Dr. Reddy Laboratories, Cadila Healthcare

Outlook

The marginal increase in Excise duty on formulations from 4 per cent to 5 per cent and Imposition of MAT on developers of Special Economic Zones as well as units operating in SEZs hurts the industry.

Overall, impact of union budget on the Pharma sector is negative.