Drug prices spiral, thanks to excise waiver in HP, Uttaranchal

New Delhi, March 23 | Updated: Mar 24 2006, 05:30am hrs
The excise exemption for drug manufacturing units in Himachal and Uttaranchal has resulted in a spiralling of prices of a large number of drugs across the country, according to government sources.

This is because of massive shifting of manufacturing from other states to these two states, to avoid excise duty, which, being MRP-based, offers a disincentive for price increase.

Over 250 medium-to-large drug manufacturing facilities have come up in Himachal and Uttaranchal in the last two years and most of these units do not produce drugs for direct sales in the market, but are available as outsourcing targets for large drug companies.

In the case of drugs that are out of the price control mechanism, the manufacturer is free to fix the MRP, which includes trade margins also. In contracting out manufacturing to units in Himachal and Uttarachal, a drug company has dual benefits- avoidance of excise duty and as a result the ability to offer huge margins to the trade for pushing its brands.

Since drug is a commodity where the choice of purchase hardly rests with the patient-consumer, there is a huge composite manufacture-trade margin space for the companies to play with.

Joint secretary department of chemicals and petrochemicals GS Sandhu says, the current trend is that drug companies use their own facilities increasingly for exports (since exports allow duty drawback) and outsource manufacturing to Himachal and Uttaranchal for domestic sales.

A recent study by the National Institute of Pharma Education and Research, a statutory body, has confirmed sudden spurt in prices of certain drugs as a result of the unhealthy trend, the official said.

Calling this an untenable practice, he said the quality is also compromised by some of the new manufacturing units.

The government, which collects about Rs 3,000 crore as excise duty on drugs, has in fact seen a marginal increase in collections after the imposition of MRP-based excise duty in January last year. It is, however, feared that if the reckless outsourcing drive goes on, the governments revenues would dip.

The finance ministry should either reduce the excise duty on drugs from 16% to 8% (which would narrow down the cost differential between excise exempt states and other states), or deprive the units doing contract manufacturing of the benefit of zero excise, said Mr Sandhu.

Chief ministers of Andhra Pradesh and Punjab and a group of parliamentarians have written to the finance minister P Chidambaram, demanding a cut in excise duty on drugs to 8%.