US border tax: Indian pharma cos may be hit.

Mumbai: Domestic pharmaceutical companies may be impacted and could see a rough road ahead in the US, if it decides to implement the proposed border adjustment tax (BAT) under the plan to revamp corporate taxes.

The new measure is aimed at boosting US manufacturing by taxing imports, while exempting US business export revenues from corporate taxation.

Analysts said the border adjustment tax will be "detrimental" to domestic companies exporting to the US, and may erode the profitability by 17-46%, if the bill is passed in the present format.

The Republicans plan to adjust taxes at the border, essentially subsidising exports and taxing imports, under the controversial corporate tax reform plan. India contributes around 30% of the overall volume of drugs consumed in the US, with generic companies, including Sun Pharma, Lupin and Glenmark, exporting around 40% of their overall sales.

The passage of the proposed BAT is not certain, an analysis by BofA Merrill Lynch Global Research said, as it has been opposed by advocates of free trade, and previously by US President Donald Trump. The measure may lead to appreciation of the dollar, thus negating to a large extent any trade/balance of payment impact. "While border adjustments for indirect taxes have not seen much challenge at the World Trade Organisation level (WTO), the US attempt at border adjustment of direct taxes might infringe WTO compliance," the report said.

The move is being opposed as it may elicit similar protectionist response from other countries which trade with the US. "BAT in its proposed form could negatively impact EBIT of Indian pharma companies by 17-46%, if the tax rate is 20%. However, if BAT is implemented and corporate tax rate is retained at the existing level of 35%, the impact could be as severe as 30-80% of FY18E," it added.

If implemented, the move may be counter-productive as domestic generic companies will be under pressure to increase prices in the US, experts said. This is at time when pharmaceutical companies are under attack in the US for high drug prices, with Trump having claimed earlier that they were "getting away with murder".

The environment may get tougher with a new procedure for bidding on drugs in the US, which is the largest market for Indian generic companies. Every 5% appreciation in the US dollar could improve the profitability of Indian companies by 4-11%. If the USD appreciates, it could offset to some extent the impact of BAT implementation, the note added.