The Centre's decision to impose excise duty on MRP of drugs is getting murkier with the industry associations moving court challenging the constitutional validity of such a step. The Union finance ministry had notified on January 7 that excise duty on drugs and medicines will henceforth be levied on the value determined after deducting an abatement of 35 per cent from the declared MRP printed on the pack. Last week, a double bench of Madhya Pradesh High Court admitted a writ petition filed by the state Small Scale Drug Manufacturers Association charging the excise duty notification of the finance ministry as a constitutional violation. The Association argues that as per the Entry No. 84 of the Indian Constitution, the government is not empowered to levy excise duty on sales value of drugs and the same can be imposed only on manufacturing costs. The pharmaceutical industry all over the country has been agitating over the decision ever since the notification was issued by the finance ministry. Major national associations like IDMA, CIPI and some of the state associations had registered their protests with the finance ministry. Industry's main objection to the notification is relating to lower abatement of 35 per cent on MRP. Industry representatives feel that 35 per cent abatement is too inadequate considering the trade margins, sample costs, breakage, spoilage, etc. The new excise regime could also badly hit pharmaceutical companies which are depending on contract manufacturers for their products.

With no change in the notification forthcoming, the pharmaceutical industry is getting support from an unexpected quarter. The chief minister of Punjab is understood to have written to the finance minister to take a second look at the controversial notification. His main concern is the likely flow of cheap drugs from Baddi of Himachal Pradesh to Punjab hitting the viability of 300 odd small scale drug units in his state. As there is no excise duty on drugs in Himachal Pradesh, drugs produced in Punjab and other parts of the country could cost 30 per cent more. That could attract the entire drug industry of Punjab to shift to Himachal Pradesh which is a neighbouring state. The Punjab CM's talk of imposing an entry tax of 30 per cent on drugs entering the state soon is based on this fear. Some of the major pharmaceutical companies based in Maharashtra and Gujarat are already planning to shift their operations to Himachal Pradesh and Jammu & Kashmir where there are many tax incentives including a nil excise duty on drugs. The main intention behind finance ministry decision to change 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 yet another reason. What went wrong with the finance ministry is that it didn't study the implications of such a major change in assessment of excise especially when the tax free zones are existing in other parts of the country. There was also no consultations with the ministry of chemicals and fertilizers and with the industry representatives before notifying such a change. Now, a correction in the notification appears to be the only option left to the finance ministry to come out of this complex issue.