Enticement For Pharmaceuticals Sector – “Drastic Times Call For Drastic Measures”
“The pandemic has brought into limelight the Atmanirbhar Mission and the Government’s new initiatives/ schemes are just the steps in right direction. To ensure revival of economy the government has announced various schemes under certain sectors including automotive, pharmaceutical, textiles etc. to establish a global supply chain and fulfil the deeply rooted moto of the Government ‘vocal for local and local for global’. These schemes will not only lead to self-sustainance but will also enable the country to wipe out the unemployment plague in a phased manner. The discussion in the present article highlights certain features of the PLI scheme in pharmaceutical sector announced on 03 March 2021 along with its detailed operational guide issued on 01 June 2021 and corrigendum on 30 June 2021 and 22 July 2021. Read on…”
1 Introduction
The Indian economy was primarily an agriculture-based economy and the public sector had the task of industrializing the country. However, the economy was not able to see the sunrise due to the inefficiency of public sector. The private sector was at its initial stages and could not flourish due to non-availability of adequate capital for investment. This proved to be an obstacle in progress of the private sector. However, realizing the importance of industrialization through both the public and private sector, the then government announced industrialization policies enabling adequate investments from foreign to ensure a comprehensive and rapid growth of the Indian economy.
Although the measure of foreign investments into the Indian Territory was for industrialization and progress of the economy, it had somewhere still left a loophole in terms of huge dependency on various countries in many sectors.
As the COVID-19 pandemic hit the world economy last year, the importance of being ‘Atmanirbhar’ was emphasized and the importance of being self-reliant on various fronts came into spotlight. One such key sector was the pharmaceutical sector. Although India has been a key source for certain drugs required for treatment of the virus on one side, the unavailability of raw materials (drugs) to manufacture vaccines in India has become a major hindrance too.
Presently India meets its huge demand for patented drugs through imports but exports only a lower value of generic drugs. This could be due to inadequate facilities for research and development or lack of investment to involve huge production capacities.
Keeping in mind all the important factors hindering the growth of the sector in all terms, The Ministry of Chemicals and Fertilizers issued a notification on 03 March 2021 rolling out a Production Linked Incentive scheme for pharmaceutical to incentivize certain high value pharmaceuticals to enable the sector flourish at its best and to penetrate in global markets. The detailed operational guidelines of the scheme were issued on 01 June 2021 providing an incentive of about INR 15000 crore across the sector for a period of 6 years from FY 2022-23 to FY 2028-29.
In the present article, we shall discuss certain key features of the scheme as laid down in the operational guidelines and corrigendum thereon:
2 Salient Features of the Scheme
1. Ultimate Outcome of the Scheme
The ultimate outcome of the scheme to the applicants is the incentive. The incentive under the present scheme is a form of financial benefit provided based on incremental sales and eligible investments done.
“The ultimate outcome of the scheme to the applicants is the incentive. The incentive under the present scheme is a form of financial benefit provided based on incremental sales and eligible investments done.”
2. Segregation of Manufacturers by Global Manufacturing Revenue (GMR)
The scheme has segregated manufacturers into three different groups basis the global manufacturing revenue (GMR). The term global manufacturing revenue means the consolidated revenue of the group (enterprise which directly or indirectly exercise 26% or more of voting right in the other or appoint more than 50% of the board of directors in other enterprise) and/ or in vitro diagnostic medical devices. Revenues from any other source for instance R&D services, rental incomes, etc., shall be excluded for calculating the GMR.
| Group | GMR – FY 2019-20 (INR) | Remarks |
|---|---|---|
| A | 5000 crore or more | Inclusive of 5000 crore |
| B | 500 crore – 5000 crore | Inclusive of 500 crore |
| C | Less than 500 crore (incl. MSME entities) | – |
3. Eligibility of the Applicant
The applicant (manufacturer) can be a proprietor, partnership firm, LLP or Company registered in India. However, the applicant should not be any willful defaulter in any Indian laws, declared bankrupt or reported as fraud by the bank or financial institution or non-banking financing company.
4. Categories of Eligible Manufactured Goods
The manufactured goods eligible for incentive under the scheme are also classified into three different categories:
| Category | Manufactured Product |
|---|---|
| 1 | Specific high value goods such as biopharmaceuticals, complex generic drugs, patented drugs or drugs nearing patent expiry, cell based or gene therapy drugs, Orphan drugs, Special empty capsules like HPMC, Pullulan, enteric etc., complex excipients, phyto-pharmaceuticals, other drugs as approved. |
| 2 | Active Pharmaceutical Ingredients / Key Starting materials / Drug Intermediates (Not covered under the earlier PLI scheme). |
| 3 | Repurposed drugs, Auto immune drugs, anti-cancer drugs, anti-diabetic drugs, anti-infective drugs, cardiovascular drugs, psychotropic drugs and anti-retroviral drugs, In-vitro diagnostic devices, Other drugs not manufactured in India, Other drugs as approved. |
It should be taken note that even though the scheme focuses on production of high value drugs, sufficient resilience is given to the API/ KSMs also to avoid any shocks to the Indian Pharmaceutical industry. It specifically also mentions that the “other drugs” as approved by the Department of Pharmaceutical (DoP) would also be eligible for application under the scheme. Hence, even if the drugs manufactured by an applicant do not fall under the general categories stated above, the applicant is eligible to approach the DoP depending on the criticality of drug requirement.
5. Selection of Applicant
Only one applicant on behalf of a group is eligible under the scheme and investment and sales will be collectively considered. Weightage has been given to the below criteria for selection of applicants:
“Only one applicant on behalf of a group is eligible under the scheme and investment and sales will be collectively considered.”
Group A & B Selection Criteria:
- The applicants under the scheme will be selected based on the gross manufacturing investment in India during the last 10 years (FY 2010-11 to 2019-20);
- Research and development expenditure as a percentage of the GMR from pharmaceutical goods in last 3 years (FY 2017-18 to 2019-20);
- Number of new drug applications by the applicant or by group company by the US/ UK/ Japan/ Canada EU country (member of PICS), WHO-GMP compliance certificate from State licensing authority regulatory agencies as on 01.04.2021.
Group C Selection Criteria:
- The applicants under the scheme will be selected based on the gross manufacturing investment in India during the last 10 years (FY 2010-11 to 2019-20);
- Number of new drug applications by the applicant or by group company by the US/ UK/ Japan/ Canada EU country (member of PICS), WHO-GMP compliance certificate from State licensing authority etc., regulatory agencies as on 01.04.2021;
- GMR from pharmaceutical goods in FY 2019-20.
Group C for MSME:
- Number of manufacturing plants in India owned by applicant/group company and approved by US/ UK/ Japan/ Canada/ EU country (member of PICS), WHO-GMP compliance certificate from State licensing authority etc., regulatory agencies as on 01.04.2021;
- GMR from pharmaceutical goods in FY 2019-20.
6. Investments: “No Pain No Gain”
As it is rightly said, No Pain No Gain. It is the responsibility of the manufacturer to make investments to receive reward in the form of incentive. The guidelines of the scheme specifies the types of expenses, which would qualify as eligible investment:
- Cut-off Date: Most importantly, the investment should be made on or after 01st April 2020.
- Plant & Machinery: Expense incurred on new plant, machinery, equipment, associated utilities including expense on packaging, freight / transport, insurance, and erection and commissioning of the new plant, machinery, equipment including laboratory equipment, IT systems as part of quality assurance/ certification/ manufacturing etc.
- Taxes and Finance Leases: The manufacturer can also add the non-creditable taxes as part of the cost. The investment made in plant & machinery can be taken under a Finance lease (as per Accounting Standard 19 – Leases or Indian Accounting Standard (Ind-AS) – 116 Leases). Further, the machinery can be used for production of products not falling under the PLI scheme. However, an appropriate declaration of usage of machinery will have to be submitted.
- Building Construction & Infrastructure Limits: Expense in relation to construction of building where a new plant and machinery is installed is eligible. However, where the internal compound wall/ roads (associated infrastructure) are constructed, the eligible investment value for such associated infrastructure is limited to 20% of investment in new plant and machinery.
- R&D Expenditure: Expenditure incurred for Research and Development (R&D) is allowed, provided the clinical trials are conducted in India.
- Technology Cost: Expenditure incurred on cost of technology purchased will also be considered as eligible investment.
- Product Registration: Expense incurred in relation to registration of the product in India and other countries including renewal charges is an eligible investment.
“Expense in relation to construction of building where a new plant and machinery is installed is eligible. However, where the internal compound wall/ roads (associated infrastructure) are constructed, the eligible investment value for such associated infrastructure is limited to 20% of investment in new plant and machinery.”
However, there are a few investments (as mentioned below) which will not be eligible to fulfill the investment criteria under the scheme:
- Second hand/ used/ refurbished plant, machinery, equipment, utilities or research and development equipment.
- Expenditure on consumables and raw material used for manufacturing.
- Expenditure on guest house building, recreational facilities, office building, residential colonies and similar structures.
- The expenditure incurred on land required for the project / unit shall not be considered for determining threshold investment.
7. Incentive Thresholds: Minimum Investment and Incremental Sales
The reward under the scheme is computed based on the incremental sales of the products every year along with the minimum cumulative investment on a timely basis.
| Group | Minimum Investment | Minimum Sales of Eligible Product |
|---|---|---|
| A | INR 1000 crores in 5 years (20% incremental every year) |
For the first Financial year (FY 2022-23) – greater than INR 50 crores and for subsequent financial years 7% of increment in sale of eligible product |
| B | INR 250 crores in 5 years (20% incremental every year) |
For the first Financial year (FY 2022-23) – greater than INR 10 crores and for subsequent financial year 7% of increment in sale of eligible product |
| C | INR 50 crores in 5 years (20% incremental every year) |
For the first Financial year (FY 2022-23) – greater than INR 1 crore and for subsequent financial year 7% of increment in sale of eligible product |
| C (MSME) | Committed Investment over a period of 5 years (20% incremental every year) |
For the first Financial year (FY 2022-23) – INR 50 lakhs and for subsequent financial year 7% of increment in sale of eligible product. |
8. Product Mix Flexibility
Certain important relaxations in the scheme include that the applicant is eligible to change the product mix up to five times during the tenure of scheme.
9. Non-Fulfillment & Exceeding Prescribed Thresholds
Where an applicant is unable to fulfill the minimum investment or incremental sales condition, the applicant will be denied the incentive for the particular year. However, it will not hinder the applicant from being eligible under the scheme in subsequent years too. Also, the applicants who exceed the prescribed minimum investments and sales will be eligible for additional incentive as per direction by DoP.
10. Computation Formula & Incentive Rates
The term incremental sales means sales of eligible product during a given Financial Year minus the baseline sales of the product in FY 2019-20. The rate of incentive is computed on the incremental sales over the base line.
| Financial Year | Incentive Rate (Products falling in Category 1 & 2) | Incentive Rate (Products falling in Category 3) |
|---|---|---|
| 2022-23 | 10% | 5% |
| 2023-24 | 10% | 5% |
| 2024-25 | 10% | 5% |
| 2025-26 | 10% | 5% |
| 2026-27 | 8% | 4% |
| 2027-28 | 6% | 3% |
3 Numerical Illustration: Complete Scenario Analysis
Let us take an instance to understand the complete scenario:
X Ltd is engaged in manufacturing of cell based therapy drugs and has global manufacturing revenue of say INR 5000 crores. The Company recorded a turnover of INR 450 crore of the eligible product in India during FY 2019-20. The Company applies under the PLI scheme notified on 3 March 2021. Let us discuss the value of incentive, which would be disbursed to the Company.
Assuming that the Company has met the requirement for minimum investment as laid down in the scheme on a timely basis. The incentive eligible under the scheme will be as follows:
| Financial Year | Net Sale of Eligible Product (Assumed) | Base Line Sales (FY 19-20) | Min. Incentive (Category A Product) |
|---|---|---|---|
| 2022-23 | 500 crores | 450 crores | 50 crores × 10% = 5 crores |
| 2023-24 (more than min. 7% growth from FY 2022-23 of 500 crores) | 550 crores | 450 crores | 100 crores × 10% = 10 crore |
| 2024-25 (more than min. 7% growth from FY 2023-24 of 550 crores) | 680 crores | 450 crores | 230 crores × 10% = 23 crores |
| 2025-26 (more than min. 7% growth from FY 2024-25 of 680 crores) | 750 crores | 450 crores | 300 crores × 10% = 30 crores |
| 2026-27 (more than min. 7% growth from FY 2025-26 of 750 crores) | 850 crores | 450 crores | 400 crores × 8% = 32 crores |
| 2027-28 (more than min. 7% growth from FY 2026-27 of 850 crores) | 920 crores | 450 crores | 470 crores × 6% = 28.20 crores |
Therefore, it is very important for the manufacturer to project its business performance in terms of both investment requirements and revenue from eligible product under the scheme.
4 Key Points to Note: In-House Consumption & Inter-Scheme Offsets
- In-House Consumption of Eligible Product in Another Eligible Product: Where the eligible product under the scheme is used for in-house consumption of another manufactured eligible product that is sold, the Company will be able to claim the benefit only for one of the products. For eg. Z Ltd is engaged in manufacture of drug A which is also used in the manufacture of another drug B and claims benefit under the PLI scheme for both the drugs. The incentive can be claimed on the drug A or drug B when the final product (drug B) is sold.
- In-House Consumption in Non-Eligible Products: Where the eligible product is used for in-house consumption and used for manufacture of any other product not eligible under the scheme, then in such a scenario the actual cost of the product will be considered as sales when the final product which consumed the eligible product is sold. Let’s say M Ltd is engaged in manufacture of various products including “drug N” for which incentive under the PLI scheme is claimed. Drug N is sold in the market and also used for manufacture of another product by the Company. Hence, when drug N is used for production of another product, M Ltd is eligible to claim the incentive on drug N to the extent of cost of the manufacture when the other product is sold.
- Inter-Scheme Overlap Prevention: In a case where the applicant has availed incentive under any other scheme on a product which is used for in-house manufacture of eligible product under this scheme. The cost of the product used for manufacture will be reduced from the sales to compute incentive under the present scheme. Thereby, an applicant can claim benefit on a product only once.
5 Disbursement of Incentive
- Application Window & PMA Inspections: The application for scheme has to be submitted between 2 June 2021 to 15 August 2021 with the Project Management Agency (PMA) appointed by the Department of Pharmaceuticals (DoP) along with necessary declarations and bank guarantee from a scheduled commercial bank. The PMA or any other agency appointed by DoP is duly authorized to visit the offices/ manufacturing facility of the applicant. After obtaining an approval, the applicant will be required to furnish a quarterly review report within 30 days from the end of every quarter.
- Changes in Ownership / Corporate Structure: However, any changes in terms of shareholding pattern or successor-in interest has to be intimated to the PMA for approval of the DoP to consider for disbursal of incentives.
- Annual Claim Submission Timeline: The applicant would be required to submit the application to claim the incentive on an annual basis along with relevant supporting within one month from the end of the financial year i.e., 30 April of succeeding FY.
- Verification & Staggered Claim Release: The PMA after due verification would release 75% of the claim and the balance 25% of the claim will be released after submitting audited accounts. Thus, enabling a successful implementation of incentive scheme to an applicant.
6 Conclusion
As it is rightly known, “Health is Wealth”. The health of the Indian economy can be invigorated only after successfully implementing the radical schemes of the government in wealth creating sectors in terms of both strengthening the economy and also creating multiple employment opportunities. Even though the country is witnessing its difficult times presently, it is to be remembered that every cloud has a silver lining. Our steps are in a positive direction and we will have to wait for a few years to reap the harvest.