I - GOODS AND SERVICES TAX (GST) Background The Estimated turnover of Indian Pharma Industry is $9 billion. India ranks 4th Globally in terms of volume and is amongst the largest producer of pharma products in the world along with USA, Japan, Europe and China. The advantage that India‟s Pharma Industry enjoys over most other nations is that the cost of labour and overall production is lower in India as compared to other Countries. However, the multistage Indirect Taxation Structure [viz Customs Duty on imports, CENVAT on Manufacture, CST / VAT on Sale of goods, Service Tax on provision of Services and levies such as entry tax, octroi, cess by the State or local Municipal Corporations] is one of the Major Obstacle in the Progress of India‟s Pharma Industry Levy of multiple taxes, loss of credit of tax paid, compliance and litigation costs associated with the present Indirect tax set up adversely impacts the Pharma Industry & directs affects Global Competitiveness GST- A Significant Indirect Tax Reform Since Independence A Simple yet Efficient and Transparent Tax System based on the fundamentals of broadened tax base, reduced rate of tax and neutral indirect tax structure forms part of the thought process behind the introduction of GST in India. Simply put, GST is a multi-state consumption based value added tax on goods and services. In his Budget Speech, the Finance Minister, reiterated the Government‟s Structure commitment towards implementation of GST and indicated a concurrent and dual GST structure for the country. IDMA, in principle, supports the introduction of GST. However, there are few suggestions set out hereafter, which needs to be considered. Suggestions GST should not result in higher tax incidence compared to existing incidence. 2% CST on Inter State Transfers should be discontinued so as to reduce transaction costs & enable formulation of Cost Effective Supply Chain Distribution Strategies. Agreed Benefits granted to Units set up in Tax Free Zones should be continued under GST. Uniform Exemption need to be granted to Life Saving Medicines under CGST & SGST C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 2 Considering the revenue neutrality, unprecedented compliance burden, and the manner in which business is organized for many decades, Jobwork & Inter Unit Transfers should be kept out of GST with appropriate revenue safeguards. Mis match of Duties on Inputs (8.24%) vis a vis Duties on Output (4.12%) in case of Active Pharmaceutical Ingredients (API) needs to be addressed so as to avoid Accumulation of Credit & Blockage of Funds. Duties / Taxes paid inputs / capital goods / inputs services which are exclusively used for R&D, need to be exempted or made CENVATABLE. Considering a major shift of activities to Tax Free Zones & likely widening of tax base, a Higher Threshold Limit of Rs 500 Lakhs should be kept for SSI Units, under GST. Robust Mechanism for Refunds to Exporters needs to be prescribed to avoid blockage of funds. II – SERVICE TAX 2.1 HEALTH SERVICES Service tax is being levied on the following Health Services provided by any hospitals, nursing homes or multi specialty clinics : a) Health Check up or Preventive Care Services provided to an employee of any business entity, payment for which is made by the business entity directly to the hospital or medical establishment. b) Health Check up or Treatment to a person covered by Health Insurance Schemes, payment for which is made directly by the Insurance Company to the hospital or medical establishment. Unlike other countries, there is no Health Security provided by the Govt to its Citizens in India. Hence, the levy adversely impacts the Common Citizen of our Country. The same needs to be appropriately addressed. Suggestions Health Services should be exempted from payment of Service tax. Alternatively, as in the case of excise duty for Life Saving Medicines, a lower rate of tax may be prescribed for Health Services. 2.2 DOUBLE TAXATION VIS A VIZ SALES TAX/VAT Service Tax law does not define what constitutes “Service” As a result, same transactions which are taxed as sale transactions (in view of deemed fiction contained in Sales Tax/VAT law) are also sometimes subjected to Service Tax. It is, therefore, essential to define service as “other than goods and deemed C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 3 goods/immovable property”. There is an urgent need to have a re-look at the entire tax structure for services especially, those services which have been subjected to Sales Tax as “Deemed Sales”. Under the present Service Tax regime there are instances where there is double taxation vis a vis various Sales Tax/VAT Laws; To illustrate. a) Sales Tax/VAT under the “Transfer of Right to use any goods for any purpose” of the relevant state [equipment leases, vehicles lease, Franchise, Royalty etc.]. b) Sales Tax/VAT under the Works Contract Tax Act. The multiple levies results in cascading effects and increases the final cost to the consumer/user Substantially. The above scenario has only been partially addressed through introduction of Service tax on Services Component comprised in specified Works Contracts and Supply of Tangible Goods for Use on which there no VAT is levied. However, based on practical experience, it is found that : Mutual Exclusiveness of Service tax law vis a vis State VAT laws is not comprehensive enough to avoid double taxation. Due to inconsistencies in Abatements under service tax vis a vis Abatements under various State VAT laws, there are situations, where a transaction of Rs. 100 would be taxed (Service Tax + VAT) on an amount which could be in excess of Rs. 100. Due to lack of clarity as to the correct legal position and as a safety measure Trade & Industry Continues to charge Service Tax & VAT on the same transaction. This substantially increases the cost to the ultimate consumer. The Service tax levy introduced on Services in relation to Copyrights [Section 65(105) (zzzzt)] would result in double taxation as explained earlier. In this regard, it is pertinent to note that, in the context of Intellectual Property Services (IPR) an abatement from Service tax has been given to the extent of Cess paid under the Research and Development Cess Act, 1986. Issues relating to Double Taxation of Service Tax & VAT need to be urgently addressed. Suggestions The term “Service” should be explicitly defined for the purpose of Service Tax so to exclude transactions which are subjected to Sales Tax /VAT and related taxes. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 4 Alternatively, Section 67 of the Act should be amended to provide that “Value of Taxable Service for the purpose of Service Tax” shall exclude value of “Sales”/”Deemed Sales” which has been subjected to Sales Tax/VAT under law of any State Government/Union Territory. Alternatively, as has been done in the context of IPR Service for Cess levied under R & D Act, Exemption should be provided under Service tax to the extent of VAT levied under State laws on the same transaction. 2.3 CENVAT CREDIT RULES, 2004 [CCR] 2.3.1 “Input Services” eligible to Credit Under the present CCR, a Manufacturer / Service Provider can avail Credit in regard to Duties / Taxes paid on Inputs / Capital Goods / Inputs Services as defined under CCR. It is a cardinal principle of VAT System that, Credit of all duties / taxes paid, need to be allowed for set off against output duty / tax payable. Disallowances are however made in respect of input services used for the purpose of business in particular leading to avoidable litigations. Suggestion Definition of “Input Service” needs to be modified as “taxable service availed in the course of and in furtherance of business”. 2.3.2 Availment of Credit in cases where Manufacturer / Service Provider is also engaged in Trading activity Under CCR only 2 types of Beneficiaries have been specified for availment of credit viz Manufacturer of final product and Output Service Provider. There are no Specific provisions under CCR to deal with situations where Manufacturer / Service Provider is also engaged in other activities like Trading. This causes severe hardships in availment of CENVAT Credit by persons engaged in multiple activities which is very common in business. Suggestion Specific provisions be made under CCR permitting apportionment of input tax credit on a rational basis with appropriate revenue safeguards, in cases where, a manufacturer / service provider is also engaged in trading / non – taxable activity Specified percentage (say 10% / 15%) of trading turnover be considered for determining proportionate credit of input taxes. 2.3.3 Accumulation of Unutilised CENVAT Credit Due to reduction in rate of Central Excise duty to 4%, there has been a substantial accumulation of Unutilized CENVAT Credit at the end of Manufacturers. This is largely due to Credit of Service tax paid on Input Services and Payments made under Reverse Charge in cash. This scenario results in Blockage of Funds. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 5 The above needs to be appropriately addressed. Suggestion Specific provisions may be made, permitting payment of Service tax under Reverse Charge, from CENVAT Credit availed and not necessarily in cash. 2.3.4 CENVAT Credit of 4% additional duty levied U/s 3(5) of Customs Tariff Act, 1985 (CTA) In terms of third proviso to Rule 3(4) of CCR, CENVAT Credit in respect of 4% additional duty levied U/s 3(5) of CTA, can be availed only by a Manufacturer of final products. Service Providers and Traders are not entitled to avail Credit. There appears to be no logical reason to deny benefit of CENVAT Credit to Service Providers. Suggestion Service Providers should be permitted to avail benefit of CENVAT Credit in respect of 4% additional duty levied U/s 3(5) of CTA. 2.3.5 Rule 6 (5) of CCR - Need for expansion Rule 6 (5) of CCR allows the CENVAT credit of the whole of service tax paid on certain specified taxable services notwithstanding the fact that the same are used for the purpose of manufacture of dutiable goods and exempted goods by a manufacturer or for provision of taxable service and exempted service by a service provider. The provision is quite pragmatic and beneficial for the manufacturers or service providers utilizing certain taxable services for their dutiable/taxable activities and exempted activities and where it is not possible to segregate the quantum of such service or maintain separate records as may be utilized in these different activities. However, with the expansion of coverage of the levy of service tax year after year, the list of taxable services specified under Rule 6(5) needs a re-visit and inclusion of certain other services in the list seriously merit consideration. Also, certain taxable services, by its very nature, cannot be segregated even if used for taxable and exempted activities. Further, the taxable service viz. „Works Contract Service‟ is conspicuous by its absence in Rule 6 (5) even though the services used in relation to setting up, modernization etc. of a factory or office premises have been specifically included in the definition of „Input Service‟ under Rule 2 (l) of CCR. This will also avoid the litigation and the manufacturers/service providers will also not be subjected to demand of huge amounts on account of availing small amounts of credit on certain services used in common by them. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 6 Suggestion The list of taxable services specified in Rule 6 (5) of CCR needs to be expanded to cover Works Contract Service and certain other taxable services viz [Telephone Services, Chartered Accountant’s Services, Company Secretary’s Services, Cost Accountant’s Services, Legal Consultancy Services, Manpower Recruitment and Supply Agencies Services etc.] hitherto left out of the scope of the provision to obviate any difficulties in segregating such services or maintaining separate records when used in common by the manufacturer or service provider for their taxable and exempted activities. 2.3.6 Rule 6 of CCR - Obligations of Manufacturer of dutiable and exempted goods and Service Provider of taxable and exempted services. a) Rule 6(6) of CCR provides that, provisions of restricted credit, shall not be applicable to excisable goods dispatched / cleared from SEZ, 100% EOU etc. However, there is no mention of Services Exported in the said sub-rule. Hence, some field formations are taking a view that provisions of restricted credit are applicable to Exported Services. This anomaly needs to be speedily addressed. b) Rule 6 (6) of CCR allows the CENVAT Credit on input or input services, as the case may be, even if the excisable goods are removed without payment of duty in certain situations. Rule 6 (6) provides for seven such situations when the CENVAT Credit has been made admissible even though the goods have been cleared without payment of duty. The provision of sub-rule (6) overrides sub-rules (1), (2), (3) & (4) of Rule 6 of CCR. One of the important omission in sub-rule (6) is job work Notification No. 214/86-CE dated 25.03.1986. The law is now well settled that the benefit of CENVAT Credit cannot be denied to the job worker when the goods are cleared without payment of duty under Notification No. 214/86-CE and when the inputs are used in common by the job worker for such job work and manufacture of goods on his own account. The inclusion of Notification No. 214/86-CE in sub-rule (6) of Rule 6 of CCR shall put the matter beyond any realm of doubt and will also be in consonance with the overall scheme of CENVAT Credit and job work. This will also avoid the fruitless litigation as the demand of CENVAT Credit in respect of job work has otherwise been considered to be a revenue-neutral exercise and only involving increased paper work. Suggestions Notification No. 214/86-CE need to be included in the list of eligible and specified clearances under sub-rule (6) of Rule 6 of CCR. Rule 6(6) of CCR should be amended to read as under : “the provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods or taxable services are removed without payment of duty/provided without payment of tax are either …… C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 7 After Rule 6(6)(v) of CCR a new item (va) should be inserted to read as under: “(va)” taxable services which are exempted in terms of Export of Services Rules, 2005. 2.3.7 CENVAT Credit on Endorsed Bill of Entry There is no provision under CCR 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 CVD component of Customs duty are required to register with the Central Excise department resulting in. Increased procedural compliances. 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 CVD to the registered manufacturer / service provider / dealer, as the case may be. The said procedure could now be reintroduced. Suggestion CCR may be amended to permit Endorsed Bill of Entry as a valid document for availing credit of CVD duty paid at the time of import. 2.4 EXPORT OF SERVICES & RELATED 2.4.1 Export of Services Rules (ESR) Introduction of Criteria based ESR (Similar for Import of Services as well) have resulted in substantial issues between the Service Tax Dept & the Tax Payers Providers as to determination whether a particular transaction constitutes “export” or “Import” for the purposes of Service Tax. The same is prone to substantial litigations. The Rules for Export / Import of Services need to be revamped on lines with prevalent International Tax Practices & Principles evolved for Taxation of Cross Border Transactions. Suggestions The Rules for Export of Services & Import of Services need to be combined into One Single Set of Rules. Under the said Rules, the Criteria for Taxation, should be specified so as to ensure that Cross Border transactions are not taxed in both the countries and at the same time transactions do not tax escape in both the countries. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 8 2.4.2 Service Tax Refunds to Manufacturer Exporters / Merchant Exporters At present refund of Service tax is being granted to the Exporters under Notification No. 17/09. Additionally, the Exporters are being granted exemption from payment of Service tax under the Business Auxiliary Service category and Transport of Goods by Road Service category under Notification 18/09. However, practical problems are being noticed in this new refund/exemption mechanism introduced wef 7.7.09 such as : Notification contains a stipulation regarding submission of original copies of some documents and that too certified by the owner/partner/director. Notification, when issued, was projected to be „essentially trust based‟ exemption by way of refund but at present the department inquires a lot about the tax payments and other such details in relation to service providers and in fact is denying the refund on the basis of minor shortcomings that exist in the invoices of service providers. It is invariably observed that, there is an inordinate delay in grant of Refunds. This results in avoidable blockage of funds available to Exporters. 15 day time limit for filing of Return in EXP2 is too short & no provisions are made for consequences in cases of cases of delay in filing. Suggestions As a matter of practical expediency, the requirement of furnishing original tax paid documents under the Simplified Refund Procedure should be done any with, and instead Certified Copies should be accepted with an undertaking from the Exporter to ensure revenue safeguards Detailed Guidelines need to be issued to the department officers regarding scrutiny of the Refunds claims and also the maximum time for disposal of any claims. Appropriate Provisions need to be made for condonation of delay in filing of EXP 2, if substantive compliance is made. In case of 100% Exporters / Substantial Exporters, guidelines need to be issued for grant of Provisional Refunds after preliminary scrutiny [say upto 70% of claim amount] with appropriate revenue safeguards. 2.4.3 SEZ Refunds Vide notification 9/2009 and 15/2009 the Government has provided two types of Exemptions from Service Tax for Services received by the SEZ units/developer. Under said Notification for Services wholly consumed within SEZ full exemption is provided however for services partially or wholly consumed outside the SEZ then the Unit/Developer has to first pay the tax and seek refund from the department on C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 9 periodic basis. The SEZ Units / Developers are facing lot of difficulties for getting the refund of service, tax so paid, Some of which are as under : a) The field formations are taking a long time to clear the refund claims b) Despite of having list of services approved by the “Approval Committee” the field formations are arbitrarily treating certain services received are not in relation to authorized operation and disallowing refund claimed on such services. c) Refund is being disallowed in cases where the SEZ unit has received the services for authorized operations and paid taxes on said services on the ground that, since the said services are wholly consumed within SEZ no refund of tax paid on said services is to be granted. The above needs to be addressed Suggestion Appropriate Clarifications need to be issued, to expedite Refunds to SEZ Units / Developers, in cases where substantive conditions are fulfilled and refunds do not result in revenue loss to the Govt. 2.4.4 Exemption to Services availed for Exports Service tax paid on Input Services availed for Exports are either availed as CENVAT Credit or are entitled to Refunds. In order to avoid blockage of funds & cumbersome procedural compliances, Services availed specifically for Exports may be exempted. Suggestion All Input Services specifically availed for Exports need to be exempted from Payment of Service tax with appropriate revenue safeguards. 2.4.5 Input Services availed by 100 % EOUs In line with the Government „s positive thinking that duties and levies should not be exported and to reduce transaction costs of Exports the Ministry of Commerce had announced that all Input services availed by 100% E O Us will be exempted from Service Tax. However no Notification is issued till date to this effect by the Ministry of Finance. Suggestion In order to make Indian goods truly competitive in the international market all taxable Input Services availed / received by 100% EOUs should be exempted at source by issue of a suitable Exemption Notification. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 10 2.5 IMPORT OF SERVICES Section 64(1) of the Finance Act, 1994 as amended from time to time (“Act”) extends to the whole of India except the State of Jammu & Kashmir and through Section 64(3) it applies to taxable services provided. Hence, Service Tax is a tax, on services “provided” in India. The scope of taxable service has been enlarged to cover Import of Services by inserting a new Section viz 66A in the Act. In order to give effect to the said amendment Government has notified. Taxation of Services (Provided from outside India and Received in India) Rules, 2006 (“ISR”) vide Notification No. 11/06 – ST 19.4.06. Though the intention of the amendment as evident from Section 66A of the Act / ISR is clearly to bring “services provided from outside India to a recipient in India” within the ambit of Service Tax by including such services within the scope of “taxable services” liable to Service Tax, a close reading of the amendment, seems to indicate that taxable services provided by a person based outside India to a person based in India, even if the services are availed and consumed outside India could be considered as services provided in India and accordingly could be liable for Service Tax. It is possible that field formations could interpret that services availed outside India & consumed outside could be subjected to Service Tax on the basis that recipient of service in India could be treated as “Deemed to have been received” Service in India. That be the case, there would be double taxation implications, whereby a transaction would be taxed in a foreign country as well as in India. Suggestion The Act should be amended to specifically provide that only services received and consumed in India, would be liable to Service Tax in case of Import of Services. 2.6 EXEMPTION TO SMALL SERVICE PROVIDERS Under the current economic scenario, the Exemption Limit of Rs. 10 lakhs, needs to be increased & rationalized. Suggestion Minimum Threshold / Exemption Limit for Small Service Providers should be increased from Rs. 10 lakhs to Rs. 25 lakhs. On lines with SSI Exemption Scheme under Central Excise, the Eligibility Limit of Turnover of the preceeding year should be kept a higher limit vis a vis the Exemption Limit, which may be around Rs. 75 lakhs. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 11 2.7 BUSINESS AUXILIARY SERVICES The Central Government has Vide Notification No. 8/2005 dated 1.3.2005 [N 8/05] exempted the taxable service of production of goods on behalf of the client from service tax subject to the following conditions: a) goods are produced using raw material or semi – finished goods supplied by the client; b) the goods so produced are returned back to the client for use in or in relation to the manufacture of any other goods on which “appropriate excise duty is payable” For the purpose of N 8-05 it has been specified in the Explanation that: “Production of goods” means working upon raw materials or semi-finished goods so as to complete part or whole of production, subject to the condition that such production does not amount to “manufacture” within the meaning of clause (f) of section 2 of the Central Excise Act, 1944. There is an apprehension that the above Exemption may not be available in cases where job work is done for Units under SSI Exemption Scheme / Units where goods are exported without payment of duty. This needs to be clarified / addressed Suggestion It needs to be clarified in the Exemption Notification itself that benefit under No 8-05 would be available in cases where Job Work is carried for Units working under SSI Exemption Scheme / Units whose goods are fully exported without payment of Duty. 2.8 PACKAGING SERVICES Vide Notification No. – 8/05, Exemption has been granted, to job work activities falling under Business Auxiliary Services. However no such exemption has been granted in relation to Packaging Services. [Section 65(105)(zzzf) of the Act] Suggestion On lines with Business Auxiliary Services, Exemption Should be granted, in regard to Packaging Services carried out on Job Work basis in regard to units which are discharging excise duty at the final stage. 2.9 MANPOWER RECRUITMENT OR SUPPLY SERVICES In the context of amended definition the following has been clarified vide CBEC Circular dt. 27.7.05. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 12 Para 22.4 Service tax is to be charged on the full amount of consideration for the supply of manpower, whether full-time or part time. The value includes recovery of staff costs from the recipient e.g. salary and other contributions. Even if the arrangement does not involve the recipient paying these staff costs to the supplier (because the salary is paid directly to the individual or the contributions are paid to the respective authority) these amounts are still part of the consideration and hence form part of the gross amount. According to practical experience, out of Gross amount charged by such Service Providers, a sizeable amount pertains to staff costs actually incurred by such Service Providers: However, though abatements are granted in regard various Services Categories, no abatement is granted for Manpower Services. This results in substantial increase in manpower costs. Suggestion In line with Govt. Policy for other services, an abatement of 60% to 70% should be granted in regard to Manpower Recruitment & Supply Service, with Suitable revenue Safeguards 2.10 PENAL PROVISIONS Substantial increase has been made in the penalties for various contraventions. The same are tabulated hereafter for ready reference. Nature of contravention Penalty Failure to obtain registration under section 69 of the To the extent of Rs. 5000 or Act or rules framed there under Rs. 200 for every day after the due date till the actual date of compliance Failure to keep, maintain or retain books of account Maximum of Rs. 5000 & documents as required under the Act or Rules framed there under Failure to furnish information, produce document To the extent of Rs. 5000 or called for by the Central Excise officer or to appear Rs. 200 for every day after in pursuance of Summons the due date till the actual date of compliance. Failure to pay tax electronically where applicable Maximum of Rs. 5000 Failure to issue invoice in accordance with the Maximum of Rs. 5000 provisions of the Act or Rules made there under or failure to account for an invoice in the books of account. Any other contravention under the Act or Rules Maximum of Rs. 5000 framed there under for which no separate penalty is provided C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 13 Penalty equal to tax amount is being invariably imposed even in cases where delays in payment of tax are due to genuine / bonafide errors. Penalty provisions are too harsh generally and goes against the spirit of law conceived on the concept of voluntary compliance. It results in severe harassment to Trade & Industry. Suggestions Maximum Penalty needs to be substantially scaled down. In cases where penalty is to be levied per day of default, an upper limit needs to be prescribed In cases of contraventions of a recurring nature [For e.g. issue of incomplete invoices etc] maximum quantum of penalty needs to be specified. Suitable Provision need to be made u/s 76 of the Act, to condone levy of penalty, in cases of non – compliance due to bonafide & inadvertant errors. III – CENTRAL EXCISE 3.1 CENTRAL EXCISE DUTY RATE STRUCTURE a) Rate of Duty Under the present rate structure, Excise Duty @8% (plus 3% Cess) is levied on the inputs viz [Active Pharmaceutical Ingredients (“API”)] whereas the output is taxed @ 4% (plus 3% Cess). This results in accumulation of CENVAT credit in the books of manufacturers especially those who are not engaged in exports and cater only to the domestic market. There is blockage of funds as well. Suggestion The excise duty rate of API needs to be rationalized & reduced from 8% to 4% as to be at par with other pharma goods. b) Abatement from MRP Vide Notification no. 49 / 08 CE (NT) dated 24.12.08 an abatement of 35% is allowed on Medicaments while calculating the assessable value for the purpose of Excise duty. Considering the increased costs of Pharma Companies abatement of 35% needs to be reviewed. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 14 Suggestion Abatement needs to increased to 45% as the current 35% abatement is not sufficient to cover the trade margins etc and the value of R&D costs and other costs incurred with the Pharma Industry. 3.2 SSI EXEMPTION SCHEME The Eligibility Limit of Value of Clearances in the preceeding year has been increased from 300 lakhs to 400 lakh wef 1-4-05. The Exemption Limit was increased from 100 lakhs to 150 lakhs wef 1-4-07. The Exemption Limits needs to be reviewed. Suggestions SSI Sector Contributes significantly to the National Economy. Considering the same, and in particular under the existing industrial scenario in the SSI Sector, the following is suggested: The Eligibility Limit under SSI Exemption Scheme should be increased to Rs. 500 lakhs from the present limit of Rs. 400 lakhs. The Exemption Limit under SSI Exemption Scheme should be increased to Rs. 200 lakhs from the present limit Rs.150 lakhs. 3.3 EXEMPTION TO ALL EXCISABLE GOODS USED FOR RESEARCH & DEVELOPMENT (R& D) Capability of Indian Companies is recognized globally and cost of carrying R&D is substantially higher for global pharma majors than Indian companies. India has emerged a hub for collaborative and outsourced R&D. Further there is fundamental shift in the business model of Indian Pharma companies from business driven research to research driven business. Suggestion Considering the long term benefits of R&D to the Economy at large, all exisable goods used for R&D purposes, should be exempted from Central Excise Duty. 3.4 CENVAT CREDIT FOR R & D Capability of Indian companies is recognized globally and cost of carrying R&D is substantially higher for global pharma majors than Indian companies. India has emerged a hub for collaborative and outsourced R&D. Further there is fundomental shift in the business model of Indian Pharma companies from business driven research to research driven business. Presently CENVAT Credit benefit under CENVAT Credit Rules, 2004 is not available to Capital Goods used for R&D purposes which do not fall under specified C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 15 Chapter Heading. Further, in regard to Inputs/Capital goods used in R & D units located outside the factory of manufacturer, benefit of CENVAT credit is not available. Suggestions Considering the potential in earning foreign exchange, to reduce research cost, CENVAT Credit on capital goods deployed for R & D activity installed within the factory premises or outside factory premises CENVAT credit should be allowed. Mechanism should be prescribed for availment of CENVAT Credit in cases where R & D units are located outside the factory of a manufacturer. 3.5 EXEMPTION FOR NATIONAL CALAMITIES During National Calamities like Floods, Cyclone etc, Pharma Companies voluntarily supply Medicines to the affected people free of cost as a humanitarian measure. However No Specific Exemption Notification has been issued in regard to Central Excise Duty for Medicines supplied for persons affected due to Rains & Other calamities of similar nature. Suggestions Considering the gratuitous gesture by Pharma Companies, Exemption Notification should be granted, in regard to Medicines supplied free during National Calamities. In cases where, Central Excise Duty has been paid in such cases, refund of duties should be granted. 3.6 CONTROL SAMPLES All pharmaceutical manufacturers have to keep aside a few boxes of each batch of medicine manufactured till its expiry as per the provisions of the Drug & Cosmetic Act & Rules there under. These samples are referred to as Control Samples which are required to test the same during the shelf life if any complaint is received in connection with quality. These samples are not sold. Field Formations are issuing show cause notices and demanding Excise Duty on such Control Samples resulting in litigations. Suggestion Control Samples, retained in terms of statutory requirements, should be fully exempted from Central Excise Duty. 3.7 PHYSICIAN’S SAMPLES Physician‟s Samples are distributed to doctors for their evaluation and feedback free of cost. In any pharmaceutical company physician‟s samples constitutes a significant cost without any commercial returns. Such samples are usually of a C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 16 distinct pack with a prominent indication that the samples are “not meant for sale”. Since physician‟s samples are not meant for sale, it would be appropriate, that they are not treated on par with regular sale products for the purposes of levy of excise duty. Suggestion Physician’s Samples should be exempted from Central Excise Duty. 3.8 Sections 11A, 11AA, 11AB and 11AC of Central Excise Act, 1944 (CEA) – Need for Consolidation Sections 11A, 11AA, 11AB and 11AC of CEA seek to provide a complete mechanism for recovery of duty not paid etc. with interest and imposition of penalty in different situations. However, the provisions as are worded (and also subjected to frequent amendments in the past), do not make a coherent, clear and unambiguous reading and the interpretation thereof is often leading to litigation. There are also certain inconsistencies in the scheme of recovery as contained in these Sections. Recently, the Hon‟ble Supreme Court, in the case of CCE, Pune V/s. SKF India Ltd. (2009) 239 ELT 385 (SC), has stressed the need to re-organize all the different sub-sections of Section 11A, frame a consolidated provision for interest and to present the entire scheme in a more coherent and readable form. Suggestions The entire scheme of recovery of duty short paid etc. or refund erroneously granted (whether due to fraud etc or otherwise) along with interest and imposition of penalty be consolidated in a single provision in a comprehensive and coherent manner. Benefit of conclusion of proceedings initiated against the Co-notices available in terms of first proviso to Section 11A(2) of CEA, when the main Noticee against whom the demand is raised makes the payment of duty with interest and penalty equal to 25% of the duty demanded (involving the cases of willful suppression of facts etc.) need to be extended to all the Co- noticees even when such payment is made by the main Noticee within 30 days of the receipt of the adjudication order in terms of proviso to Section 11AC of CEA. 3.9 REMISSION OF DUTY Under the provisions of Drugs Law, the printing of expiry date on the container / package of Medicaments & Bulk Drugs, apart of other printing like Batch / Lot Number, name & content of main ingredient. Drug License Number, required warning etc. is statutory requirement. Upon reaching the expiry Medicaments become unfit for consumption. It is obligatory under Drugs Law to ensure by the manufacturer that no such time expired medicaments go to the market and are destroyed with due observance of specified norms of destruction. In these C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 17 circumstances, self-destruction with Remission of duty on timed expired medicaments, should be allowed without obtaining permission from the department. Suggestions Amendment should be made in Rule 21 of Central Excise Rules 2002 (CER) whereby requirement of prior permission of Commissioner is relaxed in case of Medicaments & Bulk Drugs and permitting Self destruction with remission of duty. Filing of advance intimation to the Dy. Commissioner, Central Excise (DCCE), conveying the destruction schedule of such time expired medicines may be replaced in lieu of permission, to enable them to remain present if they want to supervise it. IV CUSTOMS 4.1 CUSTOMS DUTY RATE STRUCTURE a) Customs duty exemption to notified Life Saving Drugs In the Budget for 2009 -2010, basic customs duty on certain drugs (and bulk drugs for their manufacture) / vaccines has been reduced from 10% to 5%. Further these drugs have also been exempted from the excise duty / additional customs duty. Also, for certain medical devices the customs duty has been reduced from 7.5% to 5%, with a concurrent reduction in excise / additional customs duty to „Nil‟. Suggestions All Life Saving Drugs should be exempted from Customs Duty. Medical Devices should attract reduced rate of Customs duty at 5%. Life Saving Medical Devices should be exempted from Customs Duty. b) Rationalisation of Customs Duties for Formulations Presently the basic customs duty on formulations is 10% (other than specified drugs, life saving drugs, vaccines and bulk drugs for which the Basic customs duty rate is 5%). Suggestion Basic Customs Duty on Formulations should be reduced to 5%. C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 18 4.2 EXEMPTION TO IMPORTS FOR R&D Capability of Indian companies is recognized globally and cost of carrying R&D is substantially higher for global pharma majors than Indian companies. India has emerged a hub for collaborative and outsourced R&D. Further there is fundamental shift in the business model of Indian Pharma companies from business driven research to research driven business. Suggestion Import of all Capital Goods, Raw Materials, Consumables, & Reference Standards for R&D purposes should be fully exempted from Customs Duty & Others related duties. 4.3 EXEMPTION TO REFERENCE STANDARDS Reference Standards are essentially & mandatorily required for every day manufacturer, supplied free of Cost, by who or requisite body of similar nature. Suggestion Import of Reference Standards should be totally exempted from Customs Duty, CVD etc. 4.4 SPECIAL ADDITIONAL DUTY (SAD) SAD of 4% is leviable on all imports at the time of import. SAD can be claimed as refund from Customs if proof of sales data, CA certificate and other requirements are met. SAD refunds are taking more than a year to get processed at Customs against the guideline of 3 months for processing the refund. Also the process involved in processing the refunds is quite cumbersome and takes lot of time, money and adds to the transaction cost. The time limit for filing the refund is stipulated as one year but in pharmaceutical formulations business, many claims are held up as the goods are sold over a span of 2-3 years. The products sold post one year are not eligible for claiming refund. SAD duty paid at the time of import is adjusted as CENVAT credit for manufacturer importers and for the traders it is refunded. So the majority of SAD is not retained by the Government and is adjusted or refunded back to importers. Suggestions SAD duty of 4% should be abolished to facilitate trade. Alternatively, Refund Mechanism be rationalized for practical workability C:\Docstoc\Working\pdf\0c9b6fff-42f9-485a-8a0b-e6f4c106bb92.doc 19 4.5 PENALTIES In the Finance Act, 2008 there was a steep increase, in the penalties as stated hereafter Section 117 of Customs Act, 1962 Earlier Increased to Penalties for Contraventions not expressly mentioned under the Customs Act. 10,000 1,00,000 Section 158 of Customs Act, 1962 Earlier Increased to Penalties for contravention of provisions of 200/ any Rules or Regulations 500 50,000 The increase is too harsh and would encourage in harassment to Trade & Industry. Suggestion Penalties need to be substantially reduced. V – INCENTIVES TO SME 5.1 Exporters SME Exporters (DS and Pharma) have to incur expenses like US FDA Audit & NSF 173 – GMP Compliance NSF runs programs mandated for Exporters to North America, Canada and many countries covering almost every industry in water treatment, distribution, recycle, food & drugs. Many Asian Countries allows SMEs to take reimbursement from the Government for US FDA & NSF expenses so as to become globally competitive in quality & assurance. Suggestions As is done in many Asian Countries, Government should reimburse US FDA & NSF expenses, to make SME Indian Pharma Companies globally competitive. 5.2 Support for Upgradation SME‟s constitute, a core of the developing Indian Pharma Industry, which provides employment to large number of people. They need support for upgradation to become competitive in India as well as globally. Suggestions SME’s in Pharma Industry, should be provided loans at concessional rate of interest, for upgradation of Units to become & remain competitive.
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