REAL OR FAKE ? ‘Concern’ behind removal of Customs duty exemptions on drugs

Recently there were lot of murmurs  when  Central  Board of Excise & Customs ( CBEC)  came up with this notification on import duty on Drugs.

The intentions behind this import duty were quite noble as it aimed  to give a fillip to local drug manufacturers which is perfectly in line with the MakeInIndia campaign of the Narendra Modi  govt. Many domestic pharma companies cheered this news as it will enable them to compete with Foreign companies.

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But other ‘Domestic’ pharma companies like Biocon were not happy with this move. The CMD of company Kiran Mazumdar Shaw openly termed it as irrational in a bid show her ‘concern’ for the patients.

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Refer to this tweet:

Well at the outset let me assure Kiran Shaw that such apprehensions are unwarranted as nothing like this is going to happen. Below is extract of an article from Business Standard which belies such ‘expectations’

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Why will a domestic manufacturer of life saving drugs oppose removal of Customs Duty on imports which should basically be providing a level playing field for all Companies? This makes me wonder.. Will come back to it later.

Did you try to find the rationale behind removal of customs duty on the life saving drugs? Here is my take:

Firstly I opine that we should have a strong, competitive and self sufficient bulk drugs manufacturing facilities here in India. Today its not a secret that most of the bulk drugs and life saving drugs are imported from China. Our local Pharma Companies in the last 60 years have made such great strides in R&D so why these imports? Why shouldn’t India be a place where domestic and Global Companies compete on a level playing field to provide cheap and effective drugs to the consumers. In my humble opinion the Customs Duty exemptions are totally detrimental to local interests. Here is why:

To explain this lets take a simple example

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*CIF Cost Insurance Freight *CVD: Counterveiling Duty (In the last scenario, the loss is reduced to Rs 17.92

In the above scenario we can clearly see that the local manufacturer can’t compete with the importer simply because he has additional burden of standard duties on the raw materials which adds upto 26.11% to the costs whereas the importer will enjoy concessional duty or Nil duty.

How will any country be self sufficient if it taxes domestic Companies and exempts foreigners ?

Why we need to be self-sufficient in drugs ?  Well to avoid situations like these .

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Those claiming removal of customs duty exemption will lead to higher prices fail to understand the concept of MODVAT. MODVAT (Modified Value Added Tax) permits a manufacturer of goods to avail credit of duty paid on the inputs received (raw materials) and used in or in relation to the manufacture of final products and to utilise such credit towards the duty liability on final products. When a local manufacturer is not allowed to take input credit of the duties paid on raw materials, they simply becomes his ‘’Cost” which is ultimately passed onto the Consumer therefore resulting in higher prices. The manufacturer is not at loss, he simply recovers the cost from the consumer. While giving exemptions to importers the Govt. is losing on revenue. This situation leads to three scenarios: 1. Local Manufacturing will never develop as there is no level playing field. 2. We will always depend on imports. 3. Consumers will pay higher price.

As stated our local manufacturers have the capabilities to compete with the foreign Companies. They can provide quality drugs at cheaper costs if given an opportunity. So why shouldn’t we #MakeInIndia but import? Why should we give preferential indirect tax benefits to the foreign drug manufacturers? Concessional duties were introduced during the years when Customs Duty was hiked y-o-y over 110%. Is this needed right now?

The government, in my opinion had two options,

1. Exempt excise on raw materials and final products for domestic manufacturers of life saving drugs

Or

2. Remove exemption given to imports and provide a level playing field for all.

India is a signatory to WTO and free trade must be allowed without any restrictions. To think about it, this move protects our domestic industry and helps in access to life saving drugs locally manufactured. This is a great push towards self sustainability.

Coming back to Kiran Shaw CEO of Biocon opposing this move… Does it simply have anything to do with Biocon investing millions of $ and setting up a manufacturing plant in Malaysia? Indian Companies not interested to “Make In India”??

I leave it at that. Thanks.

Disclaimer: I am not an expert on customs and excise laws but have an experience of 15 years in field of Custom Clearance. I am not connected with any Pharma Company therefore no conflict of interest.

I thank Vivekanand Pandey and Ashutosh Muglikar for their valuable inputs.

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