The excise duty reduction on pharmaceuticals is unlikely to have any effect on the prices of medicines as the government has, in a parallel move, decided to cut the abatement rate for calculation of MRP based excise duty on pharmaceuticals.

The finance ministry, in a move to rationalise abatement rates, has brought down the 42.5 per cent abatement enjoyed by the drugs industry to 35 per cent.

According to industry experts, the decision implies that if the retail price declared on a pack of a drug is Rs 100, the manufacturer will now have to pay an excise duty of 8 per cent on Rs 65 (after 35 per cent abatement given for trade margins and other promotional expenses), instead of the earlier 16 per cent excise duty paid on Rs 57.5, after an abatement of 42.5 per cent.

"The pharmaceutical companies may not reduce prices of medicines, based on the excise and customs duty reductions and due to reduction in their excise benefits," said a Mumbai based analyst.

According to C L Rathi, Managing Director, Advanced Enzymes Technologies, many other steps are required for lowering the cost of medicines.

In 2005, the finance ministry had increased the abatement from 35 per cent to 40 per cent and during the last year, it was further increased to 42.5 per cent.

Units outside the hill states were demanding an increase in abatement to 60 per cent and an excise duty reduction to get a level playing field with units in the hill states enjoying zero excise duty benefits. The reduction in abatement has thus dampened the spirit of the excise duty cut, industry feel.

Out of the total Rs 35,000 crore (Rs 350 billion) plus drug production for the domestic market, more than Rs 25,000 crore (Rs 250 billion) production comes from 800 units located in the hill states.

Almost all domestic majors such as Ranbaxy [Get Quote], Dr Reddy's and Cipla and multinationals like GSK [Get Quote] and Johnson and Johnson have either own units in hill states, or rely on contract manufacturers in the hill states for production for the domestic market.

Since none of these units are affected by the reduction in excise duty, the prices of the medicines that are sourced from tax exempt states are likely to see no reduction, they added. 

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