New regime to affect retail trade margins in pharma sector

With the abatement of 35 per cent, the incidence of excise duty on drug companies would, in general, increase. And the government would have more revenue. This is because in the free segment of the retail pharma market — roughly Rs 17,000 crore accounting for 70 per cent of the total market — margins are huge at 500 per cent.

Consequently, the excise levy could work out to be more than at present, despite the squeeze on margins in the new regime. Small-scale manufacturers who are not job workers will now cut their discount offers to the trade in case of branded generics. This is because the competition in offering margins to the trade by larger companies would come down.

Small registered companies would even get a pricing edge over the bigger companies, as unit-wise promotional expenses are higher for larger companies who maintain larger markets. Consumers could gain out of this, although the benefit would be restricted because unlike in the case of fast moving consumer goods, medicines are seldom a direct choice of the patient-consumer.

In the case of drugs that are under the price control, the actual incidence of excise would indeed increase. For controlled drugs, the maximum allowable post-manufacturing expense (MAPE) is a constant at 100 per cent, and 35 p0er cent abatement is not sufficient to nullify the additional incidence of duty on account of covering the MAPE for excise determination. The retail ceiling prices of controlled drug formulations are fixed by the government exclusive of excise duty.

It is unlikely that the consumer would be totally spared from price increase in the decontrolled category too, as manufacturers may transfer part of the extra burden to them, rather than hit the trade with drastic margin reduction. This is possible given the fact that monitoring of the control-free segment of the retail pharma market by the government is far from efficient. The real reprieve for the consumer would come if the government imposed caps on trade margins in the control-free segment too.

Currently, medicines manufactured by SSIs on job work basis account for 20 per cent of the retail pharma market. This is apart from the non-SSI firms that thrive on contract manufacturing for bigger firms with strong marketing infrastructure.

As per the finance ministry notification issued on January 7, excise duty on drugs and medicines would be levied on the value determined after deducting an abatement of 35 per cent from the declared retail price. Retail price- based assessment of excise duty avoids disputes on valuation and ensures certainty in assessment, it said.