New drug investments return to Gujarat as tax sops fade after GST

The goods and services tax regime has made Gujarat Food and Drug Control Administration (FDCA) Commissioner Hemant Koshia a busy man. He and his office are handling 30-40 applications for setting up greenfield pharmaceutical plants and brownfield expansions per week. Before the indirect tax regime was rolled out, his office was handling around 10-12 such applications per week. The FDCA grants licences to manufacturing units and all new investment proposals in the state are routed through them. Koshia said around 121 fresh investment proposals were received between June 2017 and February 2018. Apart from these, another 200 proposals for brownfield projects were received. The total investment intention is estimated to be around Rs 36 billion. The bulk of these proposals is from small- and medium-sized players, primarily contract manufacturers. Some big names, too, have shown interest in setting up manufacturing units in Gujarat. Government sources said Pune-based formulations maker Emcure Pharmaceuticals was planning to set up a Rs 3 billion manufacturing facility at Sanand. An email sent to the company remained unanswered. Viranchi Shah, chairman, Indian Drug Manufacturers Association (IDMA)-Gujarat State Board, said Gujarat contributed 32 per cent to national pharmaceutical production and this share was expected to increase to 42 per cent in three to five years. “A decade ago, the skewed tax structure had pushed pharmaceutical manufacturing units out of Gujarat to states that offered tax incentives. From a 42 per cent share of national production, the state’s share had fallen to 28 per cent in 2012-13. The GST has now created a level playing field and, therefore, there is a renewed interest in the state, which is an established hub for pharmaceutical production with trained manpower and a vibrant ecosystem,” Shah added. The GST was imposed on July 1 and has the tax largely reduced the attractiveness of setting up industries in hill states. There will be budgetary support in the GST regime for eligible industrial units in Jammu and Kashmir, Uttarakhand, Himachal Pradesh and northeastern states, including Sikkim till 2027. This applies to existing units and involves a refund mechanism. However, when it comes to greenfield units, these states lose their competitive advantage vis-à-vis established pharmaceutical manufacturing hubs such as Gujarat. In the pre-GST era, industrial towns such as Baddi in Himachal Pradesh had attracted several pharmaceutical units after a subsidy scheme was announced in 2003. Around 360 pharmaceutical units had set up shop in the state because of tax incentives. At least 50-60 mid-sized and big pharmaceutical firms, including Alembic Pharma and Torrent Pharma, had moved out of Gujarat to Himachal Pradesh, Uttarakhand and Sikkim to avail of these incentives. Sikkim is home to around 14 major pharmaceutical companies with significant investments.

These include units of Cipla, Sun Pharma, Zydus Cadila, Alembic, IPCA, Alkem Lab, Intas Pharma, Torrent Pharmaceuticals and Unichem. Gujarat-based Alembic Pharmaceuticals recently sold its manufacturing facility in Baddi on a slump sale basis for an undisclosed sum to Chandigarh-headquartered Scott Edil Pharmacia. The company had said that the tax holiday was long over for its Baddi facility and it was a non-core asset in its overall business. Alembic continues to meet its domestic formulations demand from its unit in Sikkim. Pharmaceutical firms had set up manufacturing units in hill states lured by tax incentives. Many faced issues with manpower, among other things. “Lack of skilled manpower, unwillingness of employees to relocate, and frequent power cuts have been glaring issues for pharmaceutical firms that operate out of hill states. With the tax incentives gone, no fresh investment is likely to go that way," said a senior executive with a firm that has a unit in one such state. Though Gujarat has gained fresh investment proposals after implementation of the GST, this is not true for Maharashtra. Industry sources claimed that companies were not making a beeline for the state, unlike Gujarat. “This is primarily because of the prohibitive land costs in that state. Setting up a manufacturing unit is cheaper in Gujarat and for SMEs and mid-sized contract manufacturers, cost is a major driver,” said an industry source. He said several Maharashtra-based companies preferred to set up units in parts of Gujarat that border Maharashtra like Vapi and Valsad. Central Gujarat (Ankleshwar, Bharuch) is also home to bulk drug-making units. These areas are a couple of hours away from areas like Vapi. An email sent to the Maharashtra FDA remained unanswered. The Gujarat government is aware of the opportunity and is working on setting up a pharmaceutical park at Sanand as part of the Centre’s Cluster Development Programme. Around 50 hectares of land has already been identified for this purpose. Emcure is the first major investment that Sanand has received. Koshia said Gujarat had around 1,200 drug manufacturing units and around 1,000 loan licences for manufacturing. The state also has the maximum number of WHO-GMP certified manufacturers in the country at 280.

Homeward bound 30-40 weekly greenfield/brownfield pharmaceutical plant applications are handled by the Gujarat FDCA 32% Gujarat’s share in national pharmaceutical production 42% expected share of the state in 3-5 years 121 fresh investment proposals received in Gujarat after implementation of the GST 200 brownfield proposals received after the GST roll-out Rs 36 billion Total investment intentions expected 70% proposals received from small- and medium-sized players Rs 3 billion Pharmaceutical plant to be set up by Emcure at Sanand 50-60 pharmaceutical firms that had moved out of Gujarat pre-GST