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Phasing out of the exemption for export earnings over a period of five years. In the current year 20% of the earnings were brought under the direct tax net.
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No change in the customs duty.
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No change in excise duty since the duty for both bulk drugs and formulations stands at 16%.
Increasing the dividend tax to 20%
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The phase out of export exemptions would affect companies such as Hoechst Marion Roussel, Dr. Reddys Laboratories Ranbaxy and Wockhardt which have significant exports inter alia to the CIS countries.
The reduction in the peak duty of Customs duty to 35% would make no difference to the fortunes of the pharmaceutical industry since it already stands at that level. The surcharge too stays. The industry would have been happy if the customs duty on bulk drugs would have been reduced since right now the basic duty on both bulk drugs and formulations is identical at 35%.
No relief for companies which have significant imports such as Novartis, Hoechst Marion Roussel, Ranbaxy, Dr. Reddys and Smithkline Pharma.
There was no word about the possible measures to encourage research and development as well as the possible tax exemption for the milestone payments received by the pharmaceutical companies.
The increase in the dividend tax would affect the high tax payers such as Glaxo, Hoechst Marion Roussel, Knoll Pharma which payout anywhere between 40% to 55% of their profit as dividends.
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Increase in weighted reduction for R & D incentives from 125% to 200%
The existing tax benefit of 125% of expenditure on R&D had been extended to 31 March 2005 in the last year's budget. This will serve as a major incentive to the domestic pharma companies to invest in research as the cumulative tax benefit on such investments amounts to 48% (Recommended corporate tax rate - 38.5% factored 1.25 times amounts to 48.125%).
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Full tax exemption for inflows from milestone payments received (this exemption currently stands at 50%) on sale of New Chemical Entities (NCE) and Novel Drug Delivery Systems (NDDS).
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Increase in the Maximum Allowable Post-manufacturing expenses (MAPE) under the Drug Price Control Order (DPCO) from the current levels of 100%.
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With the trend towards analogue research accelerating and the top Indian companies adjusting reasonably well, one can visualise the Indian companies tapping the emerging $32 bn USA generic market over the next three years.
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The expected consolidation of the domestic pharmaceutical sector in the forseeable future would benefit the top players in terms of the availability of the OTC brands and outsourcing for manufacturing capacities.
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The sector growth has slowed down considerably. While formulation sales have come down by 7-8% the bulk drug units are facing dumping from China which has led to many bulk drug units closing down
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The expected liberalisation of the Drug Price Control Order does not seem to be materialising soon.
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