The government plans to give relief to pharmaceutical companies that suffer lower margins on price-controlled medicines produced in excise-exempt states because they cannot recoup taxes paid on ingredients.
The government is also considering a reduction in excise duty on raw materials used in making drugs from 8% to bring it in line with the 4% excise on finished product.
The department of pharmaceuticals and finance ministry are now examining these options to give relief to drug makers, said an official who asked not to be named. The relief measures would be announced either in Budget 2010-11 or immediately thereafter.
As there is no excise duty on the final product made in hill states, drug makers are unable to use the credit earned from excise duty on ingredients purchased from elsewhere to produce price-controlled medicines. Price-controlled drugs include popular brands and account for one-fifth of the over Rs 50,000-crore domestic pharmaceutical market. Major drug makers including Ranbaxy, Cipla and Nicholas Piramal have production facilities in Uttarakhand, Himachal Pradesh and North-East, where no excise duty is levied on the finished product.
In the case of drugs outside price control, that account for the remaining four-fifth of the domestic market, companies show this tax component in cost of production. But the drug price regulator National Pharmaceutical Pricing Authority (NPPA) does not permit this in the case of price controlled medicines.
Cenvat Credit Rules, 2001 allows drug producers to utilise the credit earned from excise duty on ingredients, capital goods, spare parts, lubricants and packaging material for the payment of excise duty on finished product.
It also allows similar treatment for additional excise duty and national calamity contingency duty. The inability to recoup the tax on ingredients used to make medicines that are under price control, shrinks the margins of producers on these drugs.
A reduction in excise duty on certain drug inputs is necessary because a higher excise duty on the inputs than on finished product leads to an inverted duty structure, explained a government official. The government had reduced excise duty across the board by 4% on December 7, 2008, to stimulate demand in the economy, lowering that on finished products to 4%.