Union Finance ministry's decision to start levying excise duty on maximum retail price of drugs is the second shock of the new year for the country's pharmaceutical industry. The industry is yet to recover from the Patent Ordinance which introduced the product patent regime with effect from January 1, 2005. In its notification dated January 8, the finance ministry has said that excise duty on drugs and medicines would be levied on the value determined after deducting an abatement of 35 per cent from the declared MRP printed on the pack. What has taken the pharmaceutical industry by surprise is the abruptness of the Central government in issuing such a critical notification. At the outset it appears that the impact of such a change in assessment of excise duty on drugs is not properly studied by the finance ministry. There has been neither adequate consultations with the ministry of chemicals and fertilizers nor with the industry representatives before the change was notified. By all means that was a legitimate expectation from the pharmaceutical industry. The move by the finance ministry to hold consultations on this matter afresh is an indication of a second thought about the whole issue.

The pharmaceutical industry all over the country is agitated over the finance ministry decision. Major associations like IDMA, CIPI representing small drug units and some of the state associations have already registered their protests.More agitations are expected in the coming days. The main objection is about the lower abatement of 35 per cent on MRP. According to industry representatives, 35 per cent abatement is too inadequate considering the trade margins, sample costs, breakage, spoilage, etc. They also contend that the new excise regime will badly hit pharmaceutical companies which are depending on contract manufacturers for their products. Some of the drug manufacturers based in Maharashtra and Gujarat have threatened to shift their operations to Himachal Pradesh and Jammu & Kashmir where there are many tax incentives including nil excise duty on drugs. One of the stated objectives of the Central government in changing the assessment pattern of excise duty on drugs is to avoid disputes on valuation and to ensure certainty in assessment. The huge difference between MRP and the actual manufacturing costs of generic drugs is probably another reason for the government to introduce the new assessment system. By assessing excise duty on MRP should thus force pharmaceutical companies to bring down the unreasonable MRP of generics. In the case of price controlled brands, manufacturers' margin (MAPE) is fixed at 100 per cent on the declared ex factory cost by NPPA. But, on branded products which are outside price control, manufacturers' margins are not fixed and MRP is usually quite high. Therefore, there is some justification in demanding a review of assessing excise on MRP of price controlled products. But demanding a reversal of finance ministry's decision is not right at all considering pricing of decontrolled drugs and huge margins shared by the industry and trade.