HG Koshia commissioner, Gujarat Food and Drug Control Authority, Gujarat, is a busy man. The reason is that ever since Goods and Services Tax (GST) came into force from July 1, 2017, he has been spending a lot of time in approving new pharma facilities at weekly meetings in Gandhinagar.
Earlier the state authority used to get about a couple of applications a month for new pharma facilities. Things changed after GST as it now gets about eight approval requests a month.
Koshia says that while there are many reasons for pharma companies to set up their shops in Gujarat, it was the implementation of GST that gave the sector the much-needed push. The state is well on its way to regaining its lost share in the country’s pharmaceutical production as firms are choosing Gujarat over tax havens for setting up new production facilities.
This is reflected in the fact that in the last two years, Gujarat FDCA has shown green light for building 214 new plants, both greenfield and brownfield, for manufacture of pharmaceutical products. “Of this, as many as 60-70 plants have gone into production,” adds Koshia.
What’s more? New licences have been granted to as many as 150 entities for contract manufacturing in the state.
“In the past one decade, Gujarat pharma production had hit the low of 25% share in the pharma market and also bounced back to 33% ,” Koshia said. So how has GST been a change-maker for the pharma industry?
The biggest change brought by GST is the creation of a level playing field for Gujarat by narrowing down the price and cost difference between tax havens and non-exempted states substantially.
“GST has been beneficial because it has eliminated the cascading effect of taxes. It has also reduced the number of legislations related to indirect taxes which earlier the industry had to comply with,” says Sharvil Patel, managing director, Zydus Group.
A decade back, the scenario was quite the opposite. After the tax holidays were announced starting with Himachal Pradesh in 2003, several pharma firms began migrating to tax havens in hilly states of north India to avail incentives.
The exodus back then had brought Gujarat’s share in India’s pharma production from peak 42% to less than 25%. From more than a century old Alembic Pharma to companies like Sun Pharma, Zydus Cadila, Torrent Pharma, Intas and multi-nationals like Abbot and Lupin, all have their manufacturing facilities in Gujarat. Gujarat has the highest number of ports in the country and good rail, air and road connectivity that are crucial for the pharma industry to thrive.
In the pre-GST tax regime, according to industry experts, the cost of production for making pharma products in tax havens such as Himachal Pradesh, Jammu and Kashmir, Uttaranchal and Uttarakhand was 30-35% cheaper than non-exempted states like Gujarat. Presently it has reduced to a negligible difference of 1-1.5%, said an industry expert.
“At present, Gujarat has about one-third share in India’s Rs 2.64 lakh crore pharma market,” says Viranchi Shah, chairman, Gujarat State Board, Indian Drug Manufacturers’ Association (IDMA). The share, industry players estimate, is expected to rise to 40-42% over the coming years.
Just before GST implementation, drug firms had put their expansion plans on hold as they were waiting for clarity on the new tax slabs.
Majority of the new plants that are currently being built belong to small and medium companies. Even the bigger players such as Ahmedabad-based Cadila Healthcare Ltd and Alembic Pharmaceuticals have got their plans approved for new units in the state.
These proposed new plants are mainly for manufacturing drug formulations apart from medical devices and bulk drugs. They are expected to bring in fresh investment of Rs 7,000-Rs 11,000 crore, according to sources.
The establishment of new factories will create more employment and lead to further development of associated industries in the state. According to industry estimates, pharmaceutical and allied industries in the state provide direct and indirect employment to 3-4 lakh individuals. The new plants will provide employment — directly and indirectly — to an additional 1 lakh people.
Gujarat, which accounts for 28% of the country’s exports, has a large number of pharmacy colleges and institutions, research and development (R&D) centres, contract research firms and allied industries. About 40% of machineries required for a pharma plant are made by units located in Ahmedabad alone.
“When tested for quality, drugs produced in Gujarat have failure ratio of 1.69%, while the national average for the same is 4-5%. Our quality is much higher than other states,” said an industry expert. However, this does not mean that companies are immediately shutting down their plants in the tax havens. “They will first operationalize their plants in Gujarat. Once their plants are stablized, they will gradually shift production to Gujarat. That is exactly what had happened when several companies migrated to tax havens,” said an industry player.