The January 7 notification of union finance ministry bringing drugs under MRP based excise duty assessment system is snowballing into a Central-State issue with the Punjab Government expressing strong reservations against the central decision.

The Chief Minister of Punjab is known to have written to union finance minister on the necessity to have a re-look at the notification. The state's concern stems from the fact that the notification had put survival at stake for more than 300 small and medium scale drug manufacturing units functioning within the state. These units fear the flow of "cheap" drugs from the neighbouring "duty free" state of Himachal Pradesh. Given the present excise structure, drugs produced in Punjab and rest of the country would cost 30 per cent more than the ones produced from the hill states that enjoy special excise concessions. With such a huge difference, Punjab companies will either have to shift their base to Himachal, or get closed down. Both the situations are not encouraging for the state's industrial development, Punjab CM noted.

The State Government has asked the Centre to reconsider the notification as it is placing home units in a difficult situation, thereby threatening the industrial growth. The government also said that in case the revenue consideration do not prevent such a withdrawal of the current notification, Punjab will have to think of slapping a corresponding tax on the hill states so as to ensure the parity of drug prices in the region. In other words, Punjab may have to think of an entry tax of about 30 per cent in order to keep its pharmaceutical units afloat in the coming days.

Interestingly, it is not just Punjab that is to be affected by the huge tax variation that will arise out of the January 7 notification of the ministry. The drug companies situated in states like Haryana and Uttar Pradesh are also to find their products costlier than that are coming from Himachel Pradesh, Uttaranchal and Jammu & Kashmir. The notification had given rise to nationwide protests from the pharmaceutical industry. The Madhya Pradesh High Court is already looking into the matter based on a petition filed by the M P Small Scale Drug Manufacturers Association. The association had said that MRP on excise duty is a violation of constitutional rights as the Entry No.84 of the Indian Constitution says that the government is not empowered to levy excise duty on sales value, and the excise duty can be levied only on the manufacturing expenses. State level drug associations are known to be in the process of filing similar petitions in other courts of the country as well.

All major industry organisations, including Indian Drugs Manufacturers Association (IDMA) and Organisation of Pharmaceutical Producers of India (OPPI) have opposed the notification. State level protest marches involving hundreds of affected people were organised in states like Delhi and Madhya Pradesh in the last few weeks. However, this is the first time, a State Government has expressed its views and concerns over the impact of the notification.

The notification (No. 2/2005-Central Excise NT) had brought drugs and medicines under the purview of levying excise duty on the basis of retail price declared under Drugs (Price Control) Order, 1995. The reason for the change given by the government was that the retail price based assessment of excise duty avoids disputes on valuation and ensures certainty in assessment.