Drug Wars Chidambaram Versus Paswan                          D22b

The finance ministry is ignoring the recommendations of the PM’s Task Force to make medicines affordable. Instead of the aam aadmi, pharmaceutical companies are gaining. Vikram Jit Singh reports

Odd Permutation: Chidambaram’s decision hasn’t been endorsed by many in the government AP Photo

While Finance Minister P. Chidambaram was not available for comment, Revenue Secretary KM Chandrashekhar evaded Tehelka’s efforts to seek a clarification. A detailed questionnaire to the office of the revenue secretary fetched no response

In a marked departure from the UPA government’s pro-aam aadmi stance, the Union finance ministry has decisively altered Central excise levies on drugs leading to a steep rise in drug prices.

Though ‘affordable medicines for the common man’ has been on the upa’s National Common Minimum Programme, the finance ministry decision has left the aam aadmi and the small-scale sector to bear the brunt of the price hike. And the stakes are colossal as is the potential for profiteering in the Rs 70,000 crore retail market of drugs in India. Conversely, large pharmaceutical companies have gained from the decision.

The controversy revolves around the finance ministry’s decision to levy excise duty on the drugs’ maximum retail price (MRP) as against ex-factory price. Once this move came into force, it led to an exodus of pharma majors to Uttaranchal, Jammu and Kashmir and Himachal Pradesh, states that have exempted drug manufacturers from paying excise.

Drug majors have increased the MRP of their products significantly since they began producing or contracting drug manufacture to units in these states. This is despite the fact that they don’t need to pay excise in the three states.

Contrast this with the situation of drug units in non-excise exempt states. They are at a disadvantage because they can’t hike prices as they have to pay excise, which has trebled since the ministry began calculating it on the MRP.

With the price hike, 5,500 small-scale drug manufacturers, who employ 10 lakh workers, are in danger of suffering losses. Keeping this in mind, 10 chief ministers and 50 mps wrote to Finance Minister P. Chidambaram seeking a review.

Further, the Union ministry of chemicals and fertilisers — the administrative ministry for the pharma sector — cried hoarse for a slash in excise duty on drugs from 16 percent to 8 percent. The recommendations of the pm’s Task Force on drug pricing (constituted in May 2005) languish in the finance ministry as does the letter from Chemicals Minister Ram Vilas Paswan voicing concern at drug prices and the subsequent travails. But the finance ministry remains unmoved.

CONFLICT OUT IN THE OPEN

Tehelka secured exclusive access to correspondence at the highest level of government on this issue. In his February 28, 2006 letter to Chidambaram, Paswan again spoke of the enormity of the situation.

While Paswan left it at that, Dr Sen told Tehelka that there was “a huge scam going on in the pharma industry.” He said there are “many disturbing reports on what is happening in excise-free states. All sorts of shenanigans in the name of pricing are being done there.”

Pointing to the excise anomalies in the last Budget, Dr Sen said there was “much expectation that excise on drugs will be reduced to 8 percent. This was not done although all sorts of other things had seen excise relief. However, drugs despite their importance have been equated with luxury items for excise levies. The Budget saw things like instant food mixes for dosa and idli reduced from 16 percent to 8 percent. But drugs were charged at 16 percent, which is at par with that levied on small cars.”

Dr Sen pointed out that with the shift in industry to excise-exempt states, the “net result has been that the MRP is 2-3 times higher for drugs manufactured in these states. The same drug that is manufactured in the non-exempt states and has an MRP of Rs 15 is marked at Rs 42 if manufactured in the hill states. Big companies are contract manufacturing from hill states and charging high prices. This will completely wipe out the small-scale sector.”

More significantly, Dr Sen said he had sent in the Task Force recommendations to the finance ministry in October 2005. “There has been no response to the recommendations. The ministry of finance has done nothing to rectify the situation. I can say that there is non-recognition on the part of the ministry towards this behaviour (prices) of the pharma industry,” Dr Sen told Tehelka.

The latest report by the National Institute of Pharma Education and Research submitted to Paswan’s ministry has confirmed a sudden increase in drug prices.

24 MPs SEEK INTERVENTION

Leave aside concerns voiced by another ministry, the finance ministry did not heed even the advice of a group of 24 MPs who wrote to Chidambaram on March 6, 2006, seeking a cut in excise duty on drugs to 8 percent. “Unfortunately, the General Budget for 2006-2007 has overlooked the suggestions in so far as medicines are concerned.”

“It has been proposed to provide some concessions to vital drugs (10 anti-aids and 14 anti-cancer drugs) and certain life-saving drugs, kits and equipment. It is well known that in tropical countries like India, people often require various medicines badly, which may not be under the category of ‘vital’ or ‘life-saving’ drugs. As a result the poor, especially in rural areas, who form the biggest chunk of our population, lose faith in the pharmaceutical system and often are forced to take recourse to unscientific methods... It is, therefore, strongly recommended that steps be taken to reduce the excise duty to at least 8 percent and be announced along with your final proposals before Parliament while taking up the resolution for adoption of the Budget for 2006-2007,’’ the MPs requested the finance minister.

The ministry for chemicals and fertilisers has, however, not given up the fight. Finding that the finance ministry did not heed its proposals, the ministry has sent for reconsideration three main proposals.

These include decrease in excise duty to 8 percent, increase in SSI exemption to Rs 5 crore from Rs 1 crore and the recommendation to levy excise on contract manufacturing in excise-exempt states.

CHIDAMBARAM’S DEFENCE TRASHED

Already in the vortex of the controversy, Chidambaram accentuated it by his “factually incorrect” statements in a letter to Punjab CM Amarinder Singh on November 12, 2005, that sought to allay the Punjab government’s fears on the threat to the small-scale sector. Though Amarinder had written to Chidambaram as early as March 15, 2005, it didn’t get a reply. The finance minister replied to the Punjab CM only after Amarinder shot off a missive to PM Manmohan Singh on September 1, 2005. Amarinder had demanded that the old practice of levying excise on ex-factory prices be restored.

In his letter to Amarinder, Chidambaram begins with the assertion that MRP-based excise was resorted to “provide certainty in assessment” as there were “wide variations between ex-factory prices and the assessable value of drugs for excise duty purposes resulting in disputes and litigation”. While Chidambaram cannot be faulted for citing the assessment problem as the basis for the MRP-based excise, it is his subsequent claims over the small-scale units’ role in the episode that give rise to controversy.

“Subsequently, on the request of industry, particularly small-scale industry, and on the basis of the recommendations of the C&PC department, the abatement from retail price was increased from 35 percent to 40 percent largely to help the small-scale sector. The C&PC department has stated that abatement in excess of 40 percent would not be justified. As regards the SSI exemption limits, the Task Force Report on Implementation of Fiscal Responsibility and Budget Management Act, 2003, has, in fact, recommended reduction in SSI exemption limit from Rs 1 crore to Rs 40 lakh. Small-scale pharmaceutical units are eligible for full excise duty exemption on their first clearances of Rs 1 crore during a financial year,” he said.