1 Taxation for Pharmaceutical Products

2 Introduction The Indian Pharma industry is at an infection point.Changes in the patent laws have propelled Indian pharma to the centre stage of global attention. However, in the domestic market, challenges exist with respect to pricing pressures, IPR, enforcement and data exclusivity regulation. In order to keep the momentum going, taxation and fiscal policies will be key in attracting investment and development of the pharma industry

3 Types of Taxes Taxes Direct Taxes Indirect Taxes

4 Introduction To Tax Laws in IndiaDirect Tax e.g. Income Tax, Wealth Tax Indirect Tax e.g. VAT, Service Tax, Excise duty, Customs duty

5 Direct Taxes Taxability of income in India is governed by the provisions of Income-tax Act, 1961 Direct Taxes are those in which incidence of levy is not shifted i.e. Tax is paid by the same person on whom it is levied In case of ,Indirect Tax on the other hand, burden of paying the tax is shifted to someone else

6 Direct Taxes INCOME TAXThe government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families(HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. Similarly corporate income tax is levied on income of the registered companies and corporations. The levy is governed by the Indian Income Tax Act 1961.The Indian Income tax Department is governed by the Central Board for Direct taxes(CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India.

7 Direct Taxes WEALTH TAX Came into existence 1st April 1957.Is payable every year by, individual, company, HUF, legal heirs of dead person The following assets are subjected to wealth tax: 1.Guesthouse, farm-house, commercial complex, shopping mall and residential complex are subjected to the wealth tax. 2. Valuable items like jewelry and any items made up of precious metals like gold, silver, platinum or any other precious metals. 3. Aircrafts, yachts, boats that is used for non-commercial purpose 4. Cash in hand that is more than 50,000, for individual and Hindu undivided families. Any cash that is not recorded on the account log book is subjected to the wealth tax. 5. Motor car that is owned by an individual. 6. Any urban land situated in the jurisdiction where there is a total population of ten thousand as per last census is subjected to the wealth tax.

8 Indirect Taxes Customs Duty Excise Duty Sales tax-VAT and CSTService Tax The multiplicity of indirect taxes have been the result of successive government policies, which viewed indirect taxes as a means to garner additional revenue. The final destination of the reform process would be the introduction of Goods & Services Tax (GST) in lieu of excise duty, VAT, CST and service tax.

9 Indirect Taxes CUSTOMS DUTY:Customs duty is a duty or tax, which is levied by Central Govt. on import of goods into, and export of goods from, India. It is collected from the importer or exporter of goods, but its incidence is actually borne by the consumer of the goods and not by the importer or the exporter who pay it. Customs duty consists of Basic Customs Duty (BCD)-12.5 %, additional duty of customs under section 3(1) ('CVD')-16.32% and additional duty of customs under section 3(5) (ADC)-4% Education cess at two percentage is also levied on aggregate of customs The above aggregates to an effective rate of customs duty of percent. Cvd – countervailing duty

10 Indirect Taxes CENTRAL EXCISE DUTY:duties of excise levied on all excisable goods which are produced or manufactured in India at the rates set forth in the schedule to the Central excise Tariff Together with the education cess the effective excise duty rate is 16.32%. Drugs and medicines classified under chapter heading and are subject to excise duty on the basis of the Maximum Retail Price (MRP) printed on the package with an abatement of 40 percent of MRP.

11 Indirect Taxes VALUE ADDED TAX AND CST:VAT/CST is levied on sale of movable goods in India. Barring Uttar Pradesh, Tamil Nadu and Pondicherry, all the other states in India have implemented VAT regime. Under VAT, tax is levied on each successive sale of goods with credit of tax paid on the purchase (Input Tax Credit or ITC) Drugs and medicines are taxed at four percent except Assam where the rate is six percent. To date, 11 states have introduced a system of levying tax on MRP at a single point ie first sale in the state is subject to VAT on the basis of MRP and subsequent sales, in general, are exempt.

12 Indirect Taxes VALUE ADDED TAX AND CST:MRP system is optional in six states. It should also be noted that states such as Madhya Pradesh, Chattisgarh and Orissa levy entry tax on entry of medicines and devices in to these states. CST rate is four percent against furnishing of prescribed declarations. Otherwise, the rate of tax is 10 percent or the VAT rate prevailing in the originating state, whichever is higher.

13 Indirect Taxes SERVICE TAXService tax is levied by the Central government on specified services. Service tax is not payable on export of services subject to fulfilment of prescribed conditions. Conversely, services received in India are taxed in the hands of the recipient. The rate of service tax is 12,with education cess it is 12.24%

14 Tax exemptions There are some benefits provided under the Act that are more specific to the pharmaceutical industry. Scientific research and development: Under the provisions of section 35(1) of the Act, a deduction of 100 percent expenditure is available in respect to scientific research related to the business. Subject to fulfilment of certain conditions, R&D expenditure for companies engaged in biotechnology or manufacture of drugs, pharmaceuticals, chemicals or any other article or thing notified by the Board is eligible to claim a weighted deduction of 150 percent of expenditure incurred up to March 31, 2007.

15 Tax exemptions Special Economic Zones/ Export oriented units (E0U)SEZ is the latest buzzword for investments in India. provides exemption of Excise duty in manufacturing units in SEZ’s They are duty free enclaves outside the customs territory of India SEZ developers/units are entitled to 100 percent tax holiday for 10 continuous years out of 15 years with the exemption from payment of minimum alternate tax, as well as dividend distribution tax. Even though there are various incentives that are available specific to the pharmaceutical industry, there are some challenges that are faced by the industry relating to the incentives available under the Act.

16 Cost of Inputs in a product

17 Price v/s cost Price is the amount of money or goods for which a thing is bought or sold In some cases the word ‘price’ is used to indicate what is or must be given, done, sacrificed to obtain or achieve something ‘He had to pay the price for coming late to the class.’ Cost on the other hand is the expenditure involved in the manufacture of a thing or a product Thus cost determines the price of a product or a service Cost is for the company and price is for the consumer

18 Costing System of computing cost of production or of running a business, by allocating expenditure to various stages of production or to different operations of a firm.

19 Introduction The term ‘cost’ means the amount of expenses [actual or notional] incurred on or attributable to specified thing or activity. As per Institute of cost and work accounts (ICWA) India, Cost is ‘measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services.

20 Elements in cost Elements of cost Material Labour Expenses

21 To produce or manufacture, material is required. All material which becomes an integral part of finished product and which can be conveniently assigned to specific physical unit is termed as “Direct Material”. Material is classified into two categories: Direct Material Indirect Material Indirect Material is that material which cannot be easily and conveniently identified and related with a particular product, job, process, and activity. E.g.: Office supplies, such as pens, paper, and staplers may be required in order to provide the service

22 Labour is the main factor of production.For conversion of raw material into finished goods, human resource is needed, and such human resource is termed as labour Labour can be classified into two categories Direct Labour, Indirect labour Direct labour : Labour which takes active and direct part in the production of a commodity. Direct labour is that labour which can be easily identified and related with specific product, job, process, and activity. Indirect labour : Indirect labour is that labour which can not be easily identified and related with specific product, job, process, and activity. It includes all labour not directly engaged in converting raw material into finished product.

23 Expenses are classified into two categories Direct expenses All cost incurred in the production of finished goods other than material cost and labour cost are termed as expenses. E.g.- rent paid, electricity bills etc Expenses are classified into two categories Direct expenses Indirect expenses Direct expenses: These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units. All direct cost other than direct material and direct labour are termed as direct expenses. E.g.. .Wages ,Factory rent ,Manufacturing exps, Octroi Indirect expenses: These expenses cannot be directly, easily, and wholly allocated to specific cost center or cost units. All indirect costs other than indirect material and indirect labour are termed as indirect expenses. E.g. Electricity Bills, Interest ,Rent , Salary

24 OVERHEADS The term overhead has a wider meaning than the term indirect expenses. Overheads are classified into following three categories: Factory/works/ production overheads: All indirect costs incurred in the factory for production of goods is termed as factory/works overheads. Such costs are concerned with the running of the factory or plant. Office and administrative overheads: These expenses are related to the management and administration of the business. These represent the aggregate of the cost of indirect material, indirect labour, and indirect expenses incurred by the office and administration department of an organisation. Selling and distribution overheads: Selling and distribution overheads are incurred for the marketing of a commodity, for securing order for the articles, dispatching goods sold or for making efforts to find and retain customers.

25 Classification of costCost behaviour basis Cost inventory basis Cost Relation to Cost Centre basis

26 Cost behaviour basis This is classified into :Fixed Cost: A cost that remains constant within a given period of time and range of activity in spite of fluctuations in production. Rent and insurance of building, depreciation on plant and machinery, salary of employees etc., are some examples of fixed costs. Variable cost : Variable costs are those cost which vary directly in proportion to change in volume of production/output. Direct material, direct labour, direct expenses, variable overheads are some examples of variable cost. Semi-variable cost : A cost contains both fixed and variable component and which is thus partly affected by fluctuations in the level of activity. Telephone expenses of which rent portion is fixed and call charges are variable

27 Costs by inventory This is classified into :Product cost : Product costs are those cost which are charged and identified with the product and included in stock value.(manufacturing cost) Period costs: Period costs are those costs which are not charged to products but are written off as expenses against revenue of the period during which these are incurred.e.g total administration cost

28 Cost Relation to Cost CentreThis is classified into : Direct cost :Costs which are easily and directly allocated to products or units are termed as direct cost. In the process of manufacturing of a product, materials are purchased, wages are paid to labour, and certain other expenses are also incurred directly. Indirect costs: The expenses incurred on those items which are not directly charged to a single product because they are incurred for many products are termed as indirect Costs. The example of indirect costs are Oil and scrap materials

29 Cost Relation to Cost CentreIn a pharma company : Direct cost is associated with the COGS (cost of goods sold) which is a part of the Profit and loss account of the company Indirect costs is associated with the indirect expenses which includes Selling and distribution expense Factory expense Administration expense Financial expense Which is also the part of PNL account

30 THANK YOU -PHARMA STREET