Extension of 4% excise duty on medicines and higher excise relief for small pharmaceutical units may find their way into the 2010-11 budget. The two proposals are being mooted to sustain the 15% growth seen by the sector over the last two years. The increase in the excise abatement limit to 60% from the current 35.5% will mean that only 40% of the retail price will be subject to tax.

"The decision to halve excise duty to 4%, we believe, was one of the key reasons for the over 15% growth of the Indian pharma industry," an official said. The Department of Pharma (DoP) has recommended to the revenue department that the 4% excise duty be continued this fiscal as well.

The recommendation was based on extensive consultations with stakeholders and after having solicited growth-sustaining proposals from chambers of industry and pharma platforms . The Revenue department is scheduled to hold detailed discussions on the DoPs budget proposals.

However, the governments leverage for cutting the current level of excise duty in order to boost growth further was narrow , especially given the slimmer tax collection , the fiscal deficit situation and the ongoing debate over withdrawal of economic downturn-provoked stimuli to various sectors.

Excise duty for medicines were brought down from 8% to 4% in late 2008. Central excise duty on allopathic, ayurvedic drugs and pharmaceuticals, prior to that, were as high as 16% and then lowered to 8%. The reduction in duty had also levelled the playing field for companies that had their plants outside the excise-free states, such as Himachal Pradesh, Uttaranchal and Sikkim. Most Indian pharma companies have rushed to these states which have a tax holiday for 10 years.

While the move attracted investment to these states, companies that continued to make medicines in other states were at an acute disadvantage. This reduction has to a good extent resolved the problem of migration of pharma units from non-tax exempt states to tax exempt states," official sources said on conditions of anonymity.