The failure of the Union Finance Ministry to take note of the unintended revenue loss caused by the movement of pharmaceutical companies to outsource their products from excise free zones may prove too costly if such movement is allowed to continue, it is feared.

A prominent section of the industry has complained to the Prime Minister's Office (PMO) that a good number of pharmaceutical companies, sourcing their products from these areas are working against the spirit of the tax concession provided by the central government.

They allege that many companies located outside the excise free zones are misusing such concessions granted to the units in collusion with the eligible manufacturers, by simply getting it packed from these zones and selling it under the garb of "contract manufacturing".

"The definition of manufacturing normally includes manufacturing of complete goods in the designated factory and not by transferring semi finished goods which are assembled together reducing the manufacturers' activity depriving the government of legitimate revenues and economic progress. However, under manufacturing, repacking and re-labelling the finished goods is also allowed. This law, applied in the excise free zones has lead to many companies taking their unlabelled goods and getting it labelled to avail facilities of excise and other tax benefits thereby depriving the government all duties which they would have otherwise paid in other zones outside. This is totally "a violation of the spirit of the law," industry sources allege.

The pharmaceutical manufacturers who oppose this practice have already approached the Revenue Secretary and the PMO to take note of the situation. "By allowing such activities, not only the actual purpose of the notification is defeated but also the intended industrial growth in such areas will not be achieved. It shall only lead to create a hole in the kitty of the National Exchequer and create further disparity by forcing closure of industrial units in other parts of the country and creating unemployment and social Problems," they pointed out.

Interestingly, the disparity in profits enjoyed by the pharmaceutical companies within and outside these zones will only increase with the introduction of MRP inclusive of taxes system. While the new MRP system will bring in uniform price system for drugs across the country, the profits enjoyed by the companies sourcing products from these areas would simply increase by several multiples, it is feared.

It should be noted that the Confederation of Indian Pharmaceutical Industries (CIPI-SSI) had recently sought Prime Minister's intervention in solving their longstanding problems related to MRP based excise duty and migration of business to excise free zones. The CIPI has brought to the PM's notice the increasing number of advertisements placed by manufacturers from excise free zones inviting companies to outsource drug production from them to save excise charges.