The drug traders stand to lose about one per cent of their profit margin, estimated to be an annual amount of minimum Rs 80 to Rs 100 crore, due to the stalemate prevailing in the third party drug manufacturing scenario as fallout of the MRP based excise regime.

Informed trade sources told Pharmabiz that drugs manufactured after the MRP based excise notification dated January 8 are now coming into the drug market from first week of April, the traders find to lose a minimum one per cent (variable depending on drugs and companies) of their margins in at least 20 to 25 per cent of the drugs, earlier manufactured by third party manufacturers.

The national executive of the All India Organization of Chemists and Druggists (AIOCD) is meeting in Bangalore on 28th of this month, and this would be the major issue for discussion, it is learnt. Sources hinted AIOCD would seek ‘remedial measures’, as it would be unaffordable for the traders to lose one per cent of the margin. Introduction of VAT has also caused an escalation in the administrative costs of the traders.

Sources explained as per the agreement between the manufacturers and the trade since 1995, wholesalers were eligible to get 8 per cent margin and 16 per cent for retailers in the case of controlled category (exclusive or inclusive of excise duty depending on the companies), and 10 per cent and 20 per cent respectively in the case of decontrolled drugs.

Before the introduction of MRP based excise regime, the manufacturers were paying excise on their declared price (for example a product sold at Rs 100 will have a declared cost of Rs 30, and tax is paid for Rs 30), and were paying margins to the traders deducting that tax amount, ie, margins on Rs 100-16% of Rs 30= Rs 4.80, by which margins applicable for Rs 95.20).

In the new regime, excise cannot be calculated on transfer prices, and if a product has Rs 100 as MRP, tax has to be calculated on Rs 60, after deducting the abatement of 40 per cent. Thus, in effect the margins are suffering, as excise is paid on Rs 60. Thus traders stand to lose more than one per cent as their margins are calculated as per Rs 100-16% of Rs 60 (Rs 9.60), by which margins are calculated only for Rs 90.40, instead of the earlier Rs 95.20. Thus traders are losing a good share of their profits, sources lamented.

It is estimated about 500 third party manufacturing units operate in the country with a turnover of about Rs 5000 crore, and SSI drug manufacturing industry sources claim almost all are now either ‘finished’ or in the process of shifting their base to tax free zones as directed by their clients, the pharma majors, for survival.