The pharmaceutical industry is a strategic industry that strategically contributes to India’s growth story. Globally, India ranks third in terms of pharmaceutical production by volume and is the third major product in terms of exports.
Despite being a significant contributor to the country’s exports, the sector was excluded from the RoDTEP scheme notified by the General Directorate of Foreign Trade (DGFT) on 17and August 2021. The scheme, which replaced the Merchandise Exports from India Scheme (MEIS), covered 8,555 products, with rates ranging from 0.3% to 4.3%. According to general estimates, it is observed that APIs and formulants are generally subject to significant taxes ranging from 2.47% to 6.34% and 2.74% to 5.46%, respectively, of the value FOB, according to different kinds of products.
While the sector eagerly awaited the announcement of RoDTEP tariffs for the sector or the allocation of the necessary funds in the current budget, no such announcement was made. Lately, the sector has witnessed a significant erosion of sales prices in developed economies and a simultaneous increase in domestic tax costs embedded in the price of the manufactured product. This ultimately hampered the overall exports of the pharmaceutical industry. At this difficult juncture, the extension of export incentives such as the RoDTEP is critical to the industry for sustainability and competitiveness in the global market.
While the budget has no major announcements on the RoDTEP front, one bright spot for the sector is that, in a historic move to boost exports, the budget has proposed replacing the Economic Zones Act 2005 (SEZ law) by new legislation which allows States to join in the development of companies and clusters. At the same time, reforms are also proposed in the customs administration of the SEZs with the aim of making them fully computerized. This stems from the requirements to ensure the ease of doing business by SEZ units.
Since 2005, the government has given formal approval under the SEZ Act to 425 SEZs and authorization in principle to 35 SEZs. However, from the 30and September 2021, only 268 of them were operational across the country. While SEZ exports have grown year-on-year (YoY), with the pharmaceutical industry being a major contributor, many exporters have opted out of the SEZ program in recent years. The need to modify the regime arises from the fact that many units in the SEZ have suspended their operations for various reasons such as the phasing out of tax benefits, onerous compliances/conditions such as Net Foreign Exchange (NFE) requirements against newer regimes like manufacturing. and Other Operation in Warehouse Regulation (“MOOWR”) under the Customs Act 1962. The new regime is expected to potentially ease the conditions for the use of benefits and pave the way for smoother compliance procedures . While we have to wait for the fine print of the legislation to comment further on the pros and cons of the new regime, it could significantly rekindle the interest of the pharmaceutical sector in setting up units in the SEZ and increase much-needed business agility. in the SEZs.
In addition, in order to revive the manufacturing sector, hard hit by the COVID-19 pandemic, the proposal to postpone the deadline for starting a new manufacturing unit from 31st 2023 to March 31st March 2024 is a welcome decision. In the wake of the ongoing COVID pandemic, pharmaceutical companies have faced various challenges such as supply chain disruptions, labor issues, etc. Companies may therefore not be able to meet the deadline of 31st March 2023 to commence manufacture in order to qualify for the preferential tax treatment of 15% under Section 115BAB of the Income Tax Act 1961. The extension of the deadline will be a crucial factor in facilitating the establishment of new manufacturing units.
This budget has once again focused on streamlining tariff rates and exemptions on various products, including medical devices and medicines for which there is sufficient national capacity. Exemption from customs duties on specified goods used for research and development (R&D) purposes in the pharmaceutical and biotechnology sector will be phased out by 31st March 2023. In addition, the basic customs duties on products such as artificial kidneys and disposable sterilized dialyzers and the raw materials used for the manufacture of these, X-ray machines, have been increased. Removing the exemption is certainly a step towards increasing domestic manufacturing and achieving the goal of “made in India” and Atmanirbhar Bharat.
Overall, while the budget includes some measures to spur growth, the benefits expected by industry, such as reduced GST rates on health insurance, expanded scope of products covered by the Product Linked Incentives (PLI) program and a generous push for drug research are said to have gone a long way in fueling innovation and growth in the sector.