Grave issues with MRP

COVER STORY/ PHARMA INDUSTRY

The Chemical Ministry's decision to amend the Drugs (Prices Control) Order 1995 to enforce 'maximum retail price (MRP) inclusive of all taxes' on medicine packs in October 2006 was based on the noble objective of offering consumer medicines at a fixed rate. The government wanted to put an end to the retail chemists' role in adding the tax component to the medicine price.

Almost at the same time, the Finance Ministry made another decision relating to drug MRP. The ministry wanted to change the evaluation method of excise duty on medicines from ex-factory price to MRP. By doing so, the ministry felt that it could put an end to the alleged practice of drug companies to arbitrarily raise the MRP. It was even hoped that the companies will reduce MRP in order to attract less excise duty.

Both MRP based decisions had an unexpected twist -- they triggered the exodus of pharmaceutical companies from traditional manufacturing hubs to excise-free zones of the country. Once they started functioning from excise-free zones, they could print as high MRP as they wanted without the fear of attracting a MRP-based higher duty. The additional revenue from high MRP was passed on to the retail chemist in the form of increased margins, which ensured that the high priced medicines from excise-free zones were sold first.

The decision also put hundreds of SME units, which didn't have the financial muscle to set up green field projects in excise-free zones, under tremendous pressure. They had to limit their MRP to avoid additional excise duty. At the same time, they were left with no option but to give more trade margins to the retail chemists to push their products off the shelves.

MRP-related issue snowballed into a life and death situation for SMEs functioning from the traditional industrial hubs. The result: 10 chief ministers, the chemicals and fertilizers minister, 50 members of the parliament, have all written to Prime Minister Manmohan Singh, seeking a solution to this problem.

The PM referred the matter to his Economic Advisory Council, which recommended an increase in the abatement (to set off the actual expenses and tax component from MRP) percentage on MRP while calculating the excise duty from 40 to 60 per cent. The PM is known to have accepted the recommendations and forwarded the same to the Finance Ministry.

As an alternative, reduction of excise duty from 16 per cent to 6 per cent was also suggested. The entire pharmaceutical industry, especially the troubled SME sector, was eagerly awaiting some solace from Finance Minister P Chidambaram during the Budget 2007-08, though nothing came out of it.

Once again, it is time for renewed lobbying and representations for drug SMEs. "The SME representative organisations still hope to have this sorted out" T S Jaishankar, Chairman, Confederation of Indian Pharmaceutical Industries (SSI) says.