Government of India’s great push for pharma SEZs is now facing headwinds due to adverse tax changes like the imposition of MAT and DDT. However, industry experts still believe that SEZs are pivotal to the ‘Make in India’ initiative By Prathiba Raju
The role of special economic zones (SEZs) in Indian pharmaceutical industry has been a mixed bag. Ten years ago, the launch of SEZs for the pharma sector was hailed as a panacea for all the ills that plagued the sector. The momentum however dipped due to various issues like land acquisition, relocation of companies, qualms on creation of employment, uneven economic growth and imposition of Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT).
Inspite of these obstacles, many big as well as mid and small pharma companies decided to jump on the SEZ bandwagon. They are optimistic that the Government of India’s ‘Make in India’ initiative will breathe a new life into SEZs and pharma SEZs as well. In fact, according to media reports, the Ministry of Commerce and Industry has asked the Ministry of Finance to allow companies within SEZs to sell products in the domestic market at free trade agreement rates for promoting manufacturing in the country.
“The government has been bolstering its efforts to promote the development of SEZs in the pharma sector. Owing to tax benefits and SEZ developments, the pharma industry has been contributing a premier share of exports compared to other sectors. The ratio of conversion from ‘formal approvals’ to the stage of ‘notified SEZs’ have been the highest (90 per cent) in pharma sector. With regards to the overall functioning of SEZs, procedures related to obtain permission for acquiring/ exporting materials/ services, lack of transparency in certain procedures, getting sanction of claims and time taken for approval, have been the major hurdles to develop SEZs,” said Chintan Patel, Partner, Deal Advisory, KPMG-India.
According to industry experts, introduction of ‘Make in India’ policy and the functional pharma SEZs in India like the Jawaharlal Nehru Pharma City (JNPC) in Visakhapatnam, Andhra Pradesh, developed as a joint venture between the Ramky Group and the government of Andhra Pradesh, PHARMEZ, Gujarat developed by Zydus Infrastructure and PhaEZ Park in Gujarat developed by Cadila Pharma, have kept the industry’s morale high.
A promising start …
As per the Union Commerce Ministry’s data on SEZ in India, out of the total 205 exporting SEZs in India, the pharma sector’s contribution is only six per cent. According to Invest India, national investment promotion agency, Ranbaxy, Wockhardt, Dr Reddy’s Laboratories, Lupin, Jubilant Life Sciences, Biocon, Divi’s Lab, Zydus Cadila and Nicholas Piramal are some key pharma players with manufacturing facilities in various SEZs.
Informing that SEZs have been instrumental to attract multiple pharma and biotech companies Anil Khanna, Independent Strategic Consultant and Investment Banker, said, “SEZ has helped Indian pharma companies in their export business, which in current terms nearly equals to the domestic formulation business, which is nearly Rs 100,000 crore.”
“Yes, the concept of SEZ is successful in India and now with time, apart from IT & ITES, the concept is also transcending in other domains especially in pharma. The government has been instrumental in promoting the development of SEZs in the pharma sector. A majority of the pharma sector SEZs have been ‘notified’ after being formally approved by the Centre. Currently, there are 16 SEZs under formal approvals and in notified SEZs, two are in in-principle approval category and 12 are in exporting SEZs,” said Sanjit Singh Lamba, Managing Director, Eisai Pharmaceuticals India.
Eisai was the first Japanese company to have a 100 per cent subsidiary in the Indian pharma market, and chose to set up its manufacturing facility in the RamkyPharma City (SEZ), in Visakhapatnam, which was named Jawaharlal Nehru Pharma City in 2005.
Several factors have worked in favour of Indian pharma industry. According to McKinsey report on Pharma 2020, India is the third-largest exporter of pharma products in terms of volume and is slated to grow to $55 billion by 2020.
“Pharma is a growing sector and our strength is appreciated by the international community. Globally, more and more companies are ready to take the Indian success story over the Chinese growth story. We have the expertise and strength to successfully engage agencies to cater to the global market. Willingness on the part of the government, both the state and the central will add value to the scheme. It will also help the sector to come into the proper growth trajectory. It will eventually create more job opportunities and foreign exchange revenues for the country,” said PC Nambiar, Chairman, Export Promotion Council for EOUs and SEZs (EPCES).
Currently, the pharma and chemical segment in India contributes a major share of exports from SEZs , even though the number of operational pharma SEZs are low in comparison to IT/ITES industry. According to data from the India Brand Equity Foundation (IBEF), the Indian pharma sector accounts for about 2.4 per cent of the global pharma industry in value terms and 10 per cent in volume terms. In FY 2015, the Indian pharma industry exported products worth $15 billion and exports are expected to reach $40 billion by 2020, opening up a plethora of opportunities. Availability of skilled manpower is expected to be a key growth driver for pharma industry in India, since an increasing number of pharma majors are looking to set up their establishments in the country. For example, JNPC is buzzing with activity as 27 units have begun production in joint venture with drug majors from Germany and Japan.
“JNPC is a global destiny for manufacturers of bulk drugs, active pharmaceutical ingredients and intermediates. In the current financial year, the total revenue of JNPC is Rs 15,000 crores and in 2010, we had incurred revenue of Rs 2000 crore. Hence, we are growing steadily,” said Dr Lal Krishna, CEO, Ramky Pharma City (India), Vishakhapatnam.
According to the JNPC website, 104 registered companies are within its premises, Besides Eisai Pharmaceuticals India, these include PharmaZell (I) (a company belonging to a German pharma group), SNF (I) (a company with French collaboration), Aptuit Laurus Labs with US collaboration. Leading Indian pharma names include Smilax Laboratories, Glochem, Orchid, Emmennar Biotech etc. JNPC reportedly employs to the tune of 13,000 plus and has the capcity to accommodate another 16,000, bringing home the fact that such zones spell immense employment opportunities for their sponsor state governments.
… but then things go wrong
Although SEZs have a central role to play in the country’s economic growth, the imposition of MAT and DDT, which has implications on cash-flow as well as RoI of companies, has been a major setback for all companies within SEZs, and the same is true for pharma.
Initially, exemption from DDT and MAT were two of the many incentives that attracted companies to SEZs. In 2011, both these exemptions were withdrawn. Companies and developers were levied 20 per cent MAT at book profits, and 21 per cent DDT on dividend to shareholders. It had become a a bone of contention between the government and industry players.
“The government should immediately scrap the MAT and DDT to revive investors’ interest in SEZ. This corrective measure will bring back SEZs to the forefront of economic and industrial development. A stable policy environment is need of the hour to restore confidence of domestic manufacturing and it would promote competitiveness as SEZs will boost manufacturing exports from India,” Krishna added.
It is to be understood that SEZ units contribute to the foreign exchange earnings of the country on one hand and also encourages the business of many ancillary units. Attracting foreign investment to set up shop in India and then to penalise with DDT and MAT is an act that creates unrest, disbelief and discourages foreign investors to invest any further in India, according to experts.
“The concept of an SEZ is to provide full or partial exemption from income tax for 15 years. But if MAT, which is calculated on book profit at a rate of around 21 per cent is applied, then the advantage provided for income tax exemption vanishes. As for the first five years, the effective MAT rate of 21 per cent and for next five years at six per cent is carried forward, SEZ units could not set-off the credit because of tax exemption period. This directly defeats the purpose of income tax exemption. MAT also affects the cash flow of SEZ units and generates a feeling of disbelief on government promises,” Lamba said.
Informing that the introduction of MAT and DDT has tampered with the expected speed with which SEZ sought to have taken off, Nambiar said, “EPCES has made all efforts to urge the government to continue with the scheme in the original form and not let revenue consideration come in the way of SEZ development. It is also the call of the government to exempt the domestic taxes on goods meant for export. Hence, the cries of revenue foregone is a false alarm and the decision based on such revenue foregone figures is not a good idea to pursue.” He is of the opinion that the government pursues such efforts made by the Finance Ministry from time to time, and this is a spoiler, causing problems to this sector which has been trying to be sustainable since 2006.
“The introduction of MAT and DDT was a retrograde step and this kind of an attempt to take away the promised benefits forced the investor community to rethink its association and go-slow on the SEZ operation,” Nambiar added.
According to experts, MAT and DDT should be either withdrawn or reduced to its original rate of 7.5 per cent. “If MAT is reduced to 7.5 per cent it will be a relief for investors and will provide better business facilitation packages. Hope the government will harmonise regulations across with a competitive tax regime. It is need of the hour,” Lal informed.
There could be signs that some changes might be in the offing. In May this year, responding to supplementaries during the Question Hour in Lok Sabha, Union Commerce Minister, Nirmala Sitharaman, reassured the industry that the review of the SEZ policy should not worry them and said, “The government, on the basis of inputs and suggestions received from stakeholders on the policy and operational framework of SEZ scheme periodically reviews the policy and the operational framework of SEZs and takes necessary measures so as to facilitate speedy and effective implementation of SEZ policy.”
Can ‘Make in India’ revive SEZs?
While the tax and land acquisition issues still haunt SEZ promoters and developers, the Central Government is trying to link the SEZ concept with Prime Minister Modi’s ‘Make in India’ campaign, which primarily aims to attract foreign capital into manufacturing. Investors and industry players feel that the SEZ policy continues to be relevant from a ‘Make in India’ perspective but several policy initiatives are necessary to get those going.
The thought is logical, as globally the concept of SEZs has contributed greatly to manufacturing activities and also to exports. If SEZs are encouraged with true spirit in India, it can be the major contributor to ‘The Make in India’ vision but at the same time, there should be discipline in the government machinery with consistency in their actions. More importantly, SEZ units should be understood as a tool to heal and help the balance of payment situation by generating foreign exchange for the country.
“Make in India is definitely going to help the SEZs in pharma sector. India being the largest supplier of cost-effective generic medicines to the developed world, is on the path to becoming a leader in pharma exports to the world. Many foreign companies would like to do business in India or with India, as the sector gives widest range of cost benefits. Be it in terms of labour cost, R&D cost or scientific manpower, India is full of opportunities for the pharma industry,” said LV Chandrasekhar, Lead Finance, Eisai Pharmaceuticals India. Giving some suggestions of what needs to be put in place to realise this opportunity, Chandrasekhar opines, “The overall consistency across the system while providing approvals, speedy procedures and crafting transparent policies could provide sustainability to SEZ developments. Revamping the single window clearance system, building an effective tax administration and reconsideration of MAT and DDT can bring stability and boost the development of pharma SEZs in India.”
A casualty of (interministerial) war?
According to EPCES, sustainable development in the pharma sector can happen only if intervention from the government at functional level is reduced. As Nambiar puts it, “Single window clearance is necessary. Having sought approval from the government as a SEZ unit, the company has disclosed all the facts to the Union Commerce Ministry. The ministry being the nodal agency for SEZ function should be the only single window for resolving all problems related to SEZ operations. This feature is present in the SEZ in the Act but at the ground level, the implementation is rather poor. If the single window mechanism for all the statutory permissions is made operational as originally conceived, the pharma sector will see a boom and create enough export potential and generate employment for a lot of people in the country. A lot of foreign investors are waiting in the wings to see the kind of development that is being made by the SEZs to decide their investment strategy.”
Coming to the nub of the issue, Nambiar points out, “The progress has been rather slow because the Finance Ministry is over shadowing each and every step of the Commerce Ministry, to promote the SEZ sector. The balance of payment crisis is also not of a very serious concern now and hence required impetus is not being provided.”
The SEZ policy definitely has an eminent role to play in the country’s economic growth, but all that is required are conducive policies and a comprehensive overhaul. Only then can it achieve its true potential and become a pivotal piece of the government’s ‘Make in India’ programme.