ORGANISATION OF PHARMACEUTICAL PRODUCERS OF INDIA

Transcription

1 ORGANISATION OF PHARMACEUTICAL PRODUCERS OF INDIA Peninsula Corporate Park, Peninsula Chambers, Ground Floor, Ganpatrao Kadam Marg, Lower Parel, Mumbai Telephone: , , Fax: indiaoppi@vsnl.com OPPI PRE-BUDGET MEMORANDUM A. CUSTOMS DUTY INDIRECT TAXES 1. Customs duty exemption/ reduction to Life Saving drugs, diagnostic equipments and consumables thereof and medical devices. It is imperative that critical life saving drugs be made available to the patients at reduced prices, which will help in bringing down the cost of treatment for these ailments. Further, reduction in import duty on medical devices would overall reduce the cost of treatment of patients and help in making available the best medical facility in India at relatively cheaper rates. Diagnosis is an important aspect of the healthcare, which helps in detection, prevention and cure of disease. Being a vital segment of healthcare industry, Government should make the diagnostic material tax free or rationalise the tax so as to encourage people for active participation in diagnosing the disease, which will help to prevent the disease or avoid its further aggravation. All life saving drugs (including medical devices) should be exempted from customs duty on import into India. Diagnostic equipments and consumables thereof specifically required for detecting life threatening diseases should be exempted from the levy of customs / central excise duty. Similarly other diagnostic equipments and consumables should attract lowest slab of customs/central excise duty to make diagnosis cheap and affordable to one and all in India.

2 2 2. Presently the Basic Customs Duty (BCD) on formulations is 10% (other than specified drugs, life saving drugs, vaccines and bulk drugs for which the BCD rate is 5%). : The suggestion is in line with the Chelliah Committee s longterm fiscal policy recommendation. Reduction in BCD to 5% for Formulations. Rationalisation of Customs Duty for Formulations 3. High customs and central excise duty on Neutraceuticals and Health Supplements Particulars Drugs and Pharmaceuticals Import BCD 10% 30% Additional Customs Duty ('ACD') 6% 12% Special Additional Customs Duty ('SACD') Manufacture Central excise duty Exempt (subject to conditions) 6% 12% Neutraceuticals and Health Supplements 4% (subject to specific exemptions, if any) There is no specific identified entry in the Customs and Central Excise Tariff for products generally referred as Health Supplements and Neutraceuticals. This category covers general health supplements, foods for special nutritional uses, foods for medical purposes and infant products. These products play an important role in the overall healthcare and well being of the population and in the said context, must have equal parity with the drugs/ medicines. Majority of Indian population is affected by a variety of diseases like diabetes, cardiac, cancer etc., and nutrition plays a significant role in early recovery and disease management etc., in addition to treatment and use of drugs. The healthcare industry and medical professionals have also started recognizing the role of nutrition in therapy and disease management. It is increasingly observed that the effect of drugs and other treatment are significantly better, when managed with right nutrition. Similarly, in case of infants, nutrition plays an important role in growth as well as disease management. With high rate of infant mortality in India, it is pertinent to address these nutritional issues and reduce healthcare costs.

3 3 However high BCD on import of the said goods and central excise duty of 12% makes these products costlier in the market and thus a deterrent factor for consumption of said products by the common man. Healthcare enjoys special focus of the present Government. The said products should be treated at par with drugs (from a reduced customs duty and central excise levy perspective) which would help in reducing the cost of said products to the common man, more consumption and thereby improving the overall health status of Indian population. : BCD for health supplements should be reduced to 10% and ACD / central excise duty to 6% to make it at par with Drugs. This would help in making the said products affordable to the common man and help boost the healthcare agenda of the Government.

4 4 4. ACD of 6% on import of specified drugs/ vaccines and Health Supplements. ACD on import to be treated at par with 2% on local manufacture. In the Finance Bill 2011, with effect from 1 March 2011, excise duty was levied on 130 items including specified medicaments under chapter 30 and Health Supplements under chapter 19 to be paid under two alternate options viz. excise duty at 1% (increased to 2% under Finance Bill 2012) if no Cenvat Credit is taken of inputs and input services or excise duty at 5% (increased to 6% under Finance Bill 2012) if Cenvat Credit is taken. It was later clarified by the Central Board of Excise and Customs ( CBEC ) vide TRU circular no D.O.F.B-1/3/2011-TRU dated 25 th March, 2011 that the option of 1% (increased to 2% under Finance Bill 2012) would not be available in case of ACD payable on import of goods i.e. ACD would be applicable at 5% (increased to 6% under Finance Bill 2012) in case of import of the aforesaid products. The present anomaly results in a significant cost disadvantage to companies importing drugs and health supplements vis-à-vis companies manufacturing the same products in India. ACD of 6% on drugs and health supplements has resulted in relatively high cost of these products in the Indian market. While CBEC has brought clarity on excise duty rate (ie ACD rate) of 1% on mobile phones in case of imports, the said benefit of 1% excise duty has not been provided to vaccines, specified medicaments and health supplements which are consumer health care products having greater importance than mobile phones. The basis of allowing imports of mobile 1% should be extended to import of drugs / vaccines / health supplements. In any case, if a preferential treatment of customs duty can be extended to mobile phones, the same should be extended to the said products of health care importance also.

5 5 Inspite of specifically raising this concern, there has been no change made by the Government. In our view, there is no rationale for granting customs duty benefit to imported mobiles when goods of vital importance to general public healthcare are not given the same parity. ACD should be charged at a lower rate of 2% on import of vaccines, specified medicaments and health supplements imported into India. 5. High Customs Duty of 150% BCD is applied on Pharma Grade Un-denatured Ethanol falling under CTH (Chapter 22 under the Heading BEVERAGES, SPIRITS AND VINEGAR ) even when used in manufacture of anti-cancer formulations. Imported Pharma Grade (complying to BP, USP, JP, Ph Eur) Undenatured Ethanol is used for manufacturing certain anti-cancer formulations. Pharma Grade Un-denatured Ethanol is presently classified under CTH Chapter 22 under the Heading BEVERAGES, SPIRITS AND VINEGAR. Pharma Grade Un-denatured Ethanol when imported for use in anti-cancer drugs suffers the same customs duty as that applicable for beverages or spirits. Import of Pharma Grade Un-denatured Ethanol used in manufacture of anti-cancer formulations should enjoy exemption / reduced customs duty. To ensure proper end use, importer / manufacturers may be asked to submit an end use certificate duly certified by a chartered accountant demonstrating the use of the said imported product in manufacture of anti-cancer formulations. There should also be clarity on the classification of the said product and the same should be classified under Chapter 29 of the Customs Tariff Act.

6 6 B. CENTRAL EXCISE DUTY 1) Levy of central excise (plus 3% Cess) on the inputs (Active Pharmaceutical Ingredients or API) whereas the output (Pharma formulations) is subject to central excise (plus 3% Cess). : Inverted duty rate structure has resulted to huge accumulation of Cenvat Credit for manufacturers especially those who are not engaged in exports/ have minimal exports and cater only to the domestic market. The higher rate of central excise duty on inputs namely API as compared to the duty on finished goods manufactured thereof (i.e. formulations) has led to accumulation of Cenvat Credit for the Indian Pharma formulation manufacturers as the duty paid on inputs cannot be set off against the output central excise duty liability inspite of value addition on finished goods. Further, there is no provision to get refund of the accumulated Cenvat Credit, which eventually could be a cost to such Pharma manufacturer. The central excise duty rate of API (primary raw material for Pharma formulation manufacturers) may be rationalized and made at par with Pharma goods i.e. excise duty on the inputs (API) may be reduced from 12% to 6%. Alternatively, Government should introduce a refund mechanism to enable Pharma manufacturers to avail refund of excess Cenvat Credit especially in case of such an inverted duty structure.

7 7 2) Physician samples subject to levy of Central Excise Duty. : Levy of Central Excise Duty on Physician Samples Physician samples should be exempted from central excise duty since these are not commercial packs and are given free to doctors. All packs given to doctors are marked as Physician sample, not for sale. Further, physician samples supplied without consideration are exempted from levy of Value Added Tax (VAT). Exemption from levy of central excise duty should be considered for physician samples as in line with exemption from levy of VAT. Also similar provisions for exemption under Goods and Service Tax ( GST ) should be considered for supply of physician samples going forward.

8 3) Vide notification no.49 / 2008 CE (NT) dated 24 th December 2008 an abatement of 35% allowed on Medicaments while calculating the assessable value for the purpose of central excise duty calculation. This current abatement of 35% on MRP was notified when the central excise duty on said Pharma goods was 4%. Since then over the last couple of years, the Excise Duty on Pharma goods has been increased from 4% to 6%. With the existing abatement of 35% available to medicaments, the effective rate on medicaments has also increased from 2.6% to 3.9% (which is almost equal to the excise duty rate (before abatement) that was applicable 2 years ago. This 2% increase in central excise duty has not been effectively cushioned with corresponding increase in abatement percentage by suitably amending notification no 49/ An abatement of 45% to 50% is necessary to enable Pharma industry to cover its costs while calculating the central excise duty payable on finished goods manufactured in India. Further there are other industries that enjoy a higher abatement percentage, the details are as under: Paan Masala containing tobacco: 55% Glazed tiles and vitrified tiles: 45% Mineral Waters: 45% Clocks: 40% This abatement should be increased to 45% to 50% as the current 35% abatement does not even cover the trade margins and the value of R&D costs and other costs associated with the Pharma Industry such as distribution of many medicines through cold chain (e.g. Vaccines). There are increased expenses that need to be incurred by the Pharma companies. Even otherwise, the increase in the excise duty in Finance Bill 2012 would need to be factored and accordingly Department should consider an increase in the abatement percentage for Pharma goods.

9 4) Cenvat Credit paid on capital goods is eligible for availment in two instalments i.e. the first instalment being half of the duty paid in the year of receipt of capital goods in the factory or premises of the service provider, as the case may be, and the remaining in any subsequent financial year, subject to prescribed conditions. : There exists no clear reason for differing eligible Cenvat Credit in the case of capital goods especially in the absence of similar restrictions in the case of inputs. The CBEC should consider bringing out simplicity in the provisions of law vis-a-vis availment of credit on capital goods, doing away with avoidable paper work and parity with inputs in as much as that entire 100% credit of duty paid on capital goods should be available to the manufacturer / service provider in the year of receipt of the said capital goods in their premises. In the prevalent economic scenario, this would also help improve the cash flow of the assessee. In the Finance Act, 2010, the Government allowed the manufacturers from the SSI industry to avail 100% of the credit on capital goods in the first year of receipt of capital goods. Accordingly, in line of this, the Cenvat Credit Rules, 2004 ( Credit Rules ) should be amended to provide for availing complete credit in the year of receipt of capital goods, subject to conditions. 9

10 10 5) Cenvat Credit on High Speed Diesel ( HSD ) and Light Diesel Oil ( LDO ) : HSD and LDO are used by most industries as fuel for generating electricity used in or in relation to manufacture of excisable final goods. Thus, the non-availment of credit on the duty paid on the fuels becomes additional cost to the manufacturers. The Government has been liberalizing the Cenvat Credit norms from time to time. Given the fact that Cenvat Credit is allowed on other fuels such as furnace oil, lubricants, etc., there does not seem any reason for excluding HSD and LDO outside the scope of inputs. The availment of credit on HSD and LDO would help in maintaining the chain of Cenvat Credit availability and utilization, as in the present case. The same mechanism may also be passed onto the GST regime. It is proposed that Credit Rules may be amended to permit availment of Cenvat Credit paid on HSD and LDO. HSD and LDO be included in the definition of inputs for the purpose of availing Cenvat Credit to avoid the cascading effect of taxes and duties.

11 11 6) Cenvat Credit on endorsed Bill of Entry There is no provision under Credit Rules for availing Cenvat Credit on endorsed bill of entry against import of goods. Traders who import goods and desire to pass on the credit of ACD component of customs duty are required to register with the Central Excise department. : Increased procedural compliance of getting registered as Importer with the Central Excise Department. Form A1 (i.e. Registration Form) does not contain any specific column for registering a person as an importer for the purpose of availing. Further, certain details might not be required for an importer as would be required for a manufacturer. However, the authorities are demanding all the details strictly as per the form on account of which the industry is facing procedural difficulties in convincing the authorities. 7) Cenvat Credit of SACD paid u/s 3(5) of Customs Tariff Act Only manufacturers are eligible for credit of SACD paid on import of input goods. : The same is not available to service providers. In the past, Customs officers at the port of import were allowing endorsement of the Bill of entry to enable the importer to pass on the credit of ACD to the registered manufacturer / service provider / dealer, as the case may be. The said procedure could now be continued. It is suggested that Credit Rules may be amended to recognize endorsed Bill of Entry as a valid document for availing credit of duty paid at the time of import. The erstwhile procedure of endorsement of Bill of Entry in such cases should be continued. The Central Excise legislation allows for registration of the importer under Central Excise so as to enable them to issue importers invoice as valid document for passing on Cenvat Credit of duty (ACD plus SACD) paid on imported goods. However, the present application format for registration (Form A1) under Central Excise (even under ACES registration) does not provide for registration for category of importer which leads to procedural hassles and delay in getting registration. On import of goods made by service providers the component of SACD is a cost to the service provider whereas the same is available as credit for the manufacturer. This differential treatment could be sorted out by the said amendment. Thus for a company involved in R&D and other health services activity, the said duty is a cost It is suggested that the provisions of availing credit may be extended to a service provider.

12 12 8) Labelling or relabeling in bonded warehouses As per section 2(f) of Central Excise Act, 1944 ( CEA, 44 ), definition of manufacture includes any activity of packing or repacking, labelling or relabeling. As per the Legal Metrology Act, goods sold in India have to contain specific details. Hence importers affix stickers on goods imported into India. The said activity is carried out in bonded warehouses. : A circular should be issued clarifying that such activity carried out in customs bonded warehouses should not be liable to excise duty. The rationale behind having a circular is that since CVD is already paid on MRP value there is no revenue loss to Government. Thus such activity shall not attract Excise Duty. On account of manufacturing definition, excise authorities contend that this amounts to manufacturing and accordingly excise duty has to be paid 9) Mere change in label or packing which does not increase the price should not be construed as manufacture under CEA, 44 On account of dynamic business scenario, companies have to make certain changes in product packaging wherein the label or packaging is changed. Though there is no increase in MRP. As per definition of term manufacture under CEA, 44, any process of labelling or packing would amount to manufacture. In case of Pharma goods where duty is paid on MRP value less abatement, there should not be any additional duty liability for undertaking labelling or packing activity without any increase in MRP of the said product. Alternatively, clarification to the said effect be issued by the Department which specifically provides that mere change in labelling (to comply with regulatory requirements under other laws) or product packaging to meet business requirements should not be construed as manufacture, unless there is an increase in MRP.

13 10) Amendment in the definition of Input Services under Credit Rules Input Service definition has been amended to exclude activities relating to business and services in relation to 'setting up of premises of provider of output service or a factory / office of a manufacturer; services in relation to construction of a building or a civil structure or part thereof; or laying of foundation or making of structures for support of capital goods and services of rent-a-cab and services related to employees (i.e. consumption of employees) such as outdoor catering, life/health insurance, etc. 13 The amended definition would give rise to many interpretational issues with the field authorities denying credit on all legitimate business expenditure which have not been specifically provided for in the said definition due to deletion of the specific phrase activities relating to business from the definition of input services. The definition of Input Services needs to be amended so as to ensure that credit is availed on all services which has suffered levy of service tax (whether with abatement or otherwise). The said amendment becomes important in light of the fact that the Finance Bill 2012 has levied service tax on all services (except those mentioned in negative list/ exempted list). At this backdrop, the input service definition should need to be redrafted to avoid cascading effect of service tax due to restrictions in the definition of input service as in the present form.

14 14 11) Cenvat Credit to be paid on inputs and capital goods even in case of partial write off / provision in the books. With effect from 1 March 2011, even if a part of the value of inputs or capital goods is written off or provision is made for a partial amount, entire Cenvat Credit on the capital goods is required to be written off. Prior to 1 March 2011, Rule 3 (5B) of Credit Rules provided that if the value of any input or (capital goods before being put to use) is written off fully or where any provision to write off fully has been made in the books, then the manufacturer is required to pay an amount equivalent to the Cenvat Credit taken on the said inputs / capital goods. With effect from 1 March 2011, there has been amendment to the aforesaid rule stating that the manufacturer is required to pay an amount equivalent to the Cenvat Credit taken on the inputs / capital goods even if the value of inputs or capital goods is written off partially or where any provision to write off partially has been made in the books. This has led to increased compliance hardships for manufacturing companies. The provision applicable prior to 1 st March 2011 should be restored stating that Cenvat Credit is required to be paid only if value of goods is written off fully or provision for write off fully has been made in the books and not in case of write off or provision in the books for a partial amount.

15 15 12) The Finance Bill 2012 has amended Rule 7 of Credit Rules wef 1 April 2012 wherein the following two additional conditions has been imposed on an ISD for distribution of Cenvat Credit: 1. The credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and 2. The credit of service tax attributable to service used in more than one unit shall be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates 13) Transfer of unutilised SACD to other registered manufacturing premises of the importer This new amendment has made the concept of Cenvat Credit distribution more stringent for the industry. : The objective of the legislation to introduce the concept of ISD was to avoid blockage of Cenvat Credit accumulated at the head office by allowing the distribution to its units. The conditions which existed prior to 1 st April, 2012 seemed sufficient enough to ensure that no ineligible Cenvat Credits were distributed. This was also accepted by the Tribunal in the case of Tata Steel and Ecof Industries. A suitable clarification should be issued thereby bringing out clarity on the said amendment and making it operationally simple for the industry. Credit Rules have been amended wef 1st April, 2012 to allow the manufacturers, having more than one registered premises, to transfer the unutilised accumulated SACD lying in one premises to the other premises on a quarterly basis. The said amendment would be beneficial only to a manufacturer having multiple factories. However, on account of the inverted duty structure leading to accumulated Cenvat Credit for a manufacturer of Pharma formulations, the manufacturer having only one factory would not be able to avail the benefit of the said amendment. Suitable amendment should be made in the Credit Rules to also allow an option to the manufacturers having one factory to claim refund of the accumulated Cenvat Credit thereby avoiding blockage of funds for the industry.

16 16 C. VALUE ADDED TAX ( VAT ) 1 VAT on intra-state sale of goods applicable in all states : Different VAT rates for pharma goods in different States / different description in schedule entries related to life saving drugs / medical equipment. 2 Form F to be provided for transfer of Physician samples from one state to another state. Tax authorities in general deny to issue form F for transfer of physician samples as the same are not sold but issued free (i) Life saving drugs should be exempted from VAT to lower the price to the ultimate consumer i.e. the patient, (ii) Uniform description for Bulk drugs and formulations in the State schedule entry should be adopted to ensure uniform tax rate across India. The tax rate of 4-5% on medicines and the list of taxexempt goods and declared goods should be uniform across all States. Further, States have adopted varied description in their schedule entries in relation to drugs and medicines. Specifically, Life Saving Drugs and Life Saving Medical Equipment should be included in exempt goods or zero rates of percent VAT category. After amendment in CST provision in 2005, form F has to be issued for any transfer of goods. : Hence a clarification should be issued instructing tax authorities to issue form F for all goods including samples which are not meant for sale.

17 17 3 Issuance of Form C Rule 12(7) of the Central Sales Tax Act, 1956 provides for issuance of Form C on a quarterly basis and furnishing the same to the prescribed authority within three months after the end of the period to which it relates. Prior to 1 st October 2005, the time period for issue of Form C used to be one year i.e. financial year, which was amended to the present position of quarterly basis. The obvious rationale for the above proposed amendment would help in relaxing the compliance procedures and the consequent saving in man hours spent for the same. In light of the above, it is suggested that the position prior to 1 st October 2005 may be restored. : The present provision is inconvenient for the dealers which have increased the time and cost of compliance and addition burden on the Department to meet the prescribed Form C requirements.

18 18 D. SERVICE TAX 1. Service Tax impact on Brand Owners in case of manufacture by Job Workers As per present provisions, Cenvat Credit on inputs and capital goods may be availed by a manufacturer subject to the condition that inputs / capital goods are physically received in his factory premises under cover of a valid Central Excise invoice and are used by him in or in relation to manufacture of their final goods cleared on payment of appropriate Central Excise Duty. Further, credit of service tax may be availed by a manufacturer on payment of the same to corresponding input service provider, as long as the input service is received in or in relation to manufacture of the finished goods cleared on payment of appropriate duty of Excise. Job workers, who engage in manufacture of goods for the Brand Owners, can avail the benefit of Cenvat Credit on inputs used in such manufacturing activity, subject to compliance of conditions and thereby offset their Central Excise liability on finished goods. : The Cenvat Credit on the input services consumed is a cost to the Company even though the services are utilized in relation to the business activity. In cases, where the Brand Owner itself is the manufacturer the credit would have been availed and utilized. The same should be followed in the case of a job work arrangement also as it could be construed that the said services are in relation to the business of the Company. Provisions to be made to enable the Brand Owner to avail the credit in such cases and distribute the credit to the job worker or avail the said credit on its own to do away with this inequitable situation differentiating between manufacture in-house or at the job workers premises. On the matter of Service tax credit on input services, since the payments for taxable input services are generally effected by the Brand Owner instead of the job-worker and the corresponding invoices for the said services are received in the name of the Brand Owner, the benefit of service tax paid on input services is neither available to the Brand Owner nor to the job worker. This is due to the fact that present provisions of the Credit Rules do not permit the Brand Owner to avail the credit since he is not the manufacturer of the finished goods and the job worker cannot avail the credit since he does not pay for the taxable input service, the corresponding invoices of services are not in their name and said services not directly received by them.

19 2. Technical, Testing and Analysis Services (TTAS) performed in India for service recipients located outside India. 19 Prior to 1 April 2011, TTAS qualified as export of service based on the performance of such service, i.e. the criteria for determining exports was the place of provision of service. Post 1 April 2011, the criteria for determining whether TTAS would qualify as exports was changed from performance based to recipient based. Accordingly, TTAS provided to clients located outside India qualified as export of service which was a welcome step. However, under the Negative List regime, the place of provision for technical testing services has been again shifted to the place of performance. Hence, services in relation to clinical trials provided to overseas clients may attract service tax under the Negative List regime irrespective of the location of the service recipient. Suitable amendment should be made in the Place of Provision of Service Rules, 2012 thereby restoring the earlier position with respect to TTAS considering such technical testing performed /conducted in India as export of service for clients located outside India.

20 20 3. No limitation period for service of statement of demand for subsequent period. Section 73(1A) of the FA, 94 (inserted under Finance Bill 2012) which inter alia allows the Department to serve a statement on the person chargeable to service tax for alleged non-payment of service tax in any period subsequent to the period in which a notice of demand has been served, provided that the statement is on the same grounds as the earlier notice of demand. In effect, instead of issuing periodical show cause cum demand notices to the assessee on same issue, it is now proposed that the Department could raise such demand in the form of a statement as continuation to the initial demand notice. For service of the notice of demand, Section 73 specifies a limitation period of one year (to be increased to eighteen months) or five years, depending upon the whether a case is made out to invoke suppression, mis-statement, etc. with intent to evade tax. However, plain reading of the proposed change in legislation, appears to indicate that no limitation period has been specifically mentioned for issuance / service of periodical statements. Department should specifically provide for the limitation period as applicable to service of a notice of demand should also be made applicable to service of a statement under Section 73(1A) of the FA, 94.

21 21 E. EXPORT ORIENTED UNITS (EOU) 1. Exemption to EOU units from import registration and import licence on procurement of drugs by Pharma unit Presently we understand that all the SEZ units enjoy exemption from aforesaid import procedure by Drug importer. There prevails an ambiguity with regard to extension of said benefit to EOU units. A suitable clarification in this regard would have to be issued to provide a mechanism for import of drugs by EOU units. ********