Despite the fear gripping the small and medium enterprises in pharma sector in the hilly regions of Uttarakhand and Himachal Pradesh about the possible fallout once the excise holiday is over , the officials of the two states are positive of the prospects saying that the real players will stay back because of the relative ease in doing business and the initiatives being taken by the state governments.
Uttarakhand is currently investing hugely on ease of doing business. In the last one decade there was no political interference and no law and order problem in the state. This together with minimum power tariffs and qualified manpower, Uttarakhand gives the industry an opportunity to do business freely without any interference, some of the officials point out.
At the same time Himachal Pradesh government has also plans to help the local units diversify their business. Moreover many of the experts are of the view that the Goods and Services Tax (GST ) under consideration of the Parliament would also provide a much needed booster shot to the units.
With an annual turnover of Rs 30,000 crore, of which Rs 9,500 crore involves exports, Baddi, Himachal Pradesh’s largest industrial township in Solan district, has turned into a major pharmaceutical hub, ranked third globally and manufacturing more than 150 bulk drugs, having demand in 200 countries.
Recently the state Industries Minister, Mukesh Agnihotri , said that though there were concerns over migration of industries after expiry of the central industrial package, sanctioned in 2003 by the government, sanctioning of Rs 200 crore bulk drug pharma park , besides bulk drug pharma Park and a Satellite extension centre of National Institute of Pharmaceutical Education and Research (NIPER) has come as a big boost. There is no chance for any leading pharma unit to wind-up their operations here.
Tax holiday and there after
The Union government had declared a 10 year excise holiday and a five year income tax exemption in Himachal Pradesh, Uttranchal and Jammu & Kashmir in 2002 to give a boost to these traditionally backward states. These concessions were notified in 2003 and by early 2005, entrepreneurs started coming to set up industrial ventures in these states especially in pharmaceutical sector from Gujarat, Punjab, Maharashtra and Delhi.
By middle of 2006, more than 120 pharmaceutical units were operating in Baddi alone. The number started increasing over the subsequent years but only 20 per cent of these units were owned by big companies while the rest were small units. When the duty free scheme was launched by the Centre, the excise on pharmaceuticals was 16 per cent outside the free zones and that was what actually lured the companies to these locations. The duty was later reduced to four per cent over the years and with that the units outside free zones started getting more benefits through reimbursement by way of MODVAT. The end of good times in these duty free regions started with the reduction of excise duty and many of the small and medium scale units started losing interest in continuing their operations here.
The struggle of pharma units started in Himachal and other states from 2010 with the general excise duty cut to the pharmaceutical sector and withdrawal of income tax holiday. Many reports suggest that units have been already suffering on account of non-availability of good infrastructure and access to qualified workforce.
Moreover according to some reports, with the emergence of pharma parks and cluster development projects for the pharma sector in Andhra Pradesh and Telangana with better incentives, most of the remaining pharmaceutical units in those backward states may shut down soon.
No immediate fallout
However, many of the experts refuted reports about pharma units shutting operations in Himachal after the excise duty holiday.
Dr. Rajinder Chauhan, Sr. Industrial Advisor to the department of the industries, Himachal Pradesh says that only those units which came here just to seek the benefits of the excise duty exemption will probably shut their operations. “Otherwise the units which have invested in factory, logistics, lab, manpower will remain here. Because the cost factor that runs into the operations of a factory must have nutralised in these 10 years,” said Chauhan.
He adds that the exemption started in 2003 originally for 10 years and the exemption will remain there for units who started operations by 2010 which means the component to remain there till 2020. “As of now there are no reports of any units shutting down due to excise duty factor. There may be some other factors like the ban on certain drugs or the loss in the trade or partnership dispute etc”, he told.
Approximately 1100 units are currently operating in these excise free zones that generates approximately revenue close to Rs 30000 crore says BR Sikri, co- chairman, the Federation of the Pharma Enterprises-FOPE and vice president of the IDMA North Zone. He adds that in the absence of the excise rebate, the region might lose significance, as it will have direct impact on the operations of the small units.
“Excise free zone was announced by the government in the 2003-05. Now as it is coming to an end the region might lose its significance. There are places like Solan, Kalan, Paonta Sahib, Baddi in Himachal and places like Selaqui in Dehradun, Haridwar and Rudrapur in Uttarakhand having these units. Now the benefit related excise in these areas is coming to an end from this year, it will have a direct impact on the operations of the units currently involve in the pharma sector”, he said. He hopes that if the GST becomes a reality, the smaller units might get a breather.
“If GST comes, it would have a wider impact and all the regions (states) will be at par vis-à-vis tax regime and the units will be in a position to continue their operations, which otherwise may not be possible. And there will be a great risk for MSME sector, which is primarily is in contract manufacturing on P2P basis, to work in absence the excise rebate. The large companies may survive,” he added.
Some of the government officials in Uttarakhand also believe that the companies which had invested here for a long term will stay back. Further the officials point out that there are clusters developed in these areas having common facilities and a lot of investment have been made in infrastructure there which is specific to the pharma industry requirement.
Additional Director, SC Nautiyal, Uttarakhand Department of Industries says, “The state is currently investing hugely on ease of doing business. Our state in last one decade has proved that there is no political interference, no law and order problem. This together with minimum power tariffs and qualified manpower, Uttarakhand gives industry an opportunity to do business freely without any interference. And we hope that after GST becoming a reality, the excise factor would also become ineffective.”
Travails of SMEs
However, many reports suggest that a large number of small and medium companies located at the former excise free zones are struggling to keep their operations afloat. Further there were reports about the crumbling infrastructure facilities and undependable manpower in the area. Left with little option, these companies are now considering shutting down their operations.
BR Sikri to this says, “The excise duty exemption is coming to end and this year onwards and in next couple of years the exemption will be gone completely. The units there are already struggling to keep their operations on and it’s just the matter of time before the chain effect start. We may be seeing a larger impact in coming years.”
Further to add the woes of these states, now many states are working to nurture local pharma production offering attractive incentives which had further erode interests to sustain operations in Himachal and Uttarakhand. However, experts feel that none of the states are giving any special packages to the industry.
Explains Sikri “None of the states are giving any special incentives to the pharma sector. Taxation is a central government subject and only they can decide on this issue. Neither Union Government nor any state government is coming up with any such schemes. The local government can only give capital subsidy when the unit starts operations. They can only request the union government to let the excise duty continue for next five years.”
But that is unlikely to happen, as hinted many a times by the union government, which is unlikely to continue with these exemptions. And therefore the GST becomes more vital since it has the potential to bring all the states at par with respect to tax regime. And there will be level - playing field and the units may not shift as there will be uniform tax structure.
Special incentives needed
On question of other states giving special attention to the pharma sector, Dr. Chauhan of the Himachal Industries Department says, “The union government is pushing the GST and therefore it would subsume the excise factor. We hope that the units would continue their operations without much hassle. Locally the government would definitely think of diversifying to sectors like devices amongst others to help the industry survive.”
But if the GST isn’t there, the operations will really be difficult, because not only taxation, but there are other factors as well that are putting pressure on the MSME pharma sector.
Says Sikri, “If GST will not come, people will move out (certainly). As there is an indirect pressure on MSMEs (as well) to upgrade to WHO level, PICs level, introduction of bar coding, and discontinuation of FDC. These are some of the indirect jolts to the pharma industry. And a majority of the units involved in these places are manufacturing the fix dosage drug. Power tariffs are almost same, skilled manpower will move wherever they get financial incentives. However, since the physical infrastructure is there, they would prefer to remain there if the GST becomes a reality.”
The attempt to develop these states comes to an end with that. Grant of tax holidays or some central incentives for a limited period cannot ensure development of pharmaceutical sector in a state or a region. For that, active support of the state governments in terms of infrastructure, an efficient regulatory machinery and skilled man power are necessary. Further, ease of doing business plays a vital role in development of an industry.
Also with GST coming into effect, the overall taxation will come down considerably, and the industry could avoid multiplicity of the taxation thereby getting relief on tax front. Currently CENVAT, excise, state VAT and other local levies make the cost of production much higher. GST will bring uniformity and there will be just one tax applicable.