The excise duty burden on the small scale pharmaceutical units could go up by 42.44 per cent as a result of the new MRP based excise duty structure, an increase by 260 per cent from the earlier excise duty structure, and the burden on large scale manufacturers could remain unchanged, opine industry experts.
In simple terms, the SSIs will have to pay an additional excise burden of Rs 6.53 on a Rs 100 MRP product, whereas the larger units need not have to shelve any additional rupee from the earlier excise regime, according to the analysis of the Confederation of Indian Pharmaceutical Industry (CIPI ssi) leaders.
So far the sales prices of large manufacturers were 31-35 per cent lower than MRP and that of SSI units was 71-75 per cent of MRP, and excise was paid on this calculation. In the case of SSIs, products are marketed through franchisees and the marketing as well as distribution cost is born by the marketing associates. Thus SSIs pass on their products to these marketing outfits at price which is sum total of production cost + excise + profit. Whereas large manufacturers have their own marketing set up and they market their products directly to the distributing agencies, by which the sales price of such units is sum total of production cost + excise + marketing expenses + profit.
Currently the distribution expenses on a Rs 100 MRP product is - 20 for retailers margin (for DPCO products-16), 8 -10 for wholesaler's margin, 3-5 for C& F charges, thus accounting for a total of 31-35 per cent. Marketing expenses come around 40 per cent, (salary & expenses - 20, sampling cost - 5, sales promotion expenses 10, expiry products return 5), and thus the total marketing and distribution expenses of SSIs are 31-35% + 40%, that is 71 - 75 per cent. By this calculation, the sale value of small-scale units was MRP - 71-75%, and that for larger units, it was MRP - 31-35%.
Thus the SSIs had to pay only Rs 4.08 as effective excise duty since they pay duty only for Rs 25 (an excise duty of Rs 16.32 % on respective sales price) for Rs 100 MRP product. By the new structure, with the abatement of 35%, the SSIs also will have to pay duty for Rs 65, that is Rs 10.61, an additional burden of Rs 6.53, an increase by 260%.
The larger units were paying an excise of Rs 10.61 on Rs 65 (MRP- 35%), and by the new structure, the amount remains unchanged, as 35% is the abatement.
SSIs sources opine that the decision is helpful for the large units as they can show higher costs, and can avoid the DPCO. DPCO comes into effect only when the drug sales go beyond Rs 25 crore, and the SSIs never comes into this bracket. The only burden of the large-scale units will be to manufacture themselves, instead of relying on SSI to leverage the excise benefit. Already the leading company managements are in the process of instructing their concerned departments to stop production with the SSIs, say industry sources.
CIPI also points out many consequences by the decision, and temptation to tax evasion is one among them. "New tax evading channels may evolve for taking advantage of this very tempting high burden tax structure, and many will fall prey for this," notes CIPI sources.
They also point out one of the reasons forwarded for MRP based excise system is to control huge trade margins in some of the generic drugs. Already many large players of generics are situated in excise-exempted zones and they will not be affected by the move. In fact, heavy excise burden will provide added advantage to remaining generic units to relocate themselves to such zones. Other generic units on pretext of excise change will even hike their MRP. However, government may earn little more excise from them, but the very purpose of rationalization of prices of generics will not be achieved. On the other hand, non-generic SSI units for their survival may try to compensate higher excise through higher MRP. This will again provide chance for MRP hike to big players even though they may not be affected by such excise changes, and there is real possibility of all round price hike of medicines.
If the government is planning to stick with the MRP based excise regime, the government should modify the notification so that excise rate for SSI units is MRP less 75%, to prevent closure of SSI pharmaceutical units, demand CIPI.