Tax plan for LLPs to hit pharma profits

MAT on income from factories operated in partnerships may crimp Cadila, Sun Pharma, earnings by 10-11%

by Namrata Nandakumar & C.H. Unnikrishnan
    
The  budget proposal to levy a minimum alternate tax (MAT) on limited liability partnership (LLPs) firms and other firms associated with companies, is expected to have an impact on drug makers.

They may now have to pay income-tax on profits posted by their factories operated through partnerships or other forms of firms registered outside the parent companies.


“In order to moderate the outgo on profit-linked deductions, I propose to extend the levy of alternate minimum tax on all persons other than companies, claiming profit-linked deductions,” Mukherjee said in his speech on Friday.

“This has brought income from partnerships under the tax bracket. It will be charged 18.5%,” said Surya Patra, associate vice-president, pharma, at brokerage Systematix Shares and Stocks Ltd. He pointed out that some of the top pharma companies, including Sun Pharmaceutical Industries Ltd and Cadila Healthcare Ltd, earn income from partnerships. Investors took note of the impact, with shares of at least a dozen drug makers taking a hit on Friday after the announcement.

Sun Pharma shares fell 7.9%, the highest drop in 2012, to close at Rs. 545 on the Bombay Stock Exchange. Cadila dropped 5.33% to Rs. 711 and Orchid fell 3.72% to Rs. 168. The Benchmark Sensex shed 1.19%.

“Though the proposal is not specific to the pharma industry, the earnings of Sun Pharma and Cadila would take a hit of about 10-11%, as they used to generate meaningful earnings from their partnership firms,” Patra said.

A Sun Pharma spokesperson said his company has factories in Sikkim and Jammu under partnerships with an employee welfare trust. “It could be one of the reasons for investors to react on the stock negatively on the budget day,” he said. 

“We are already under MAT, so we will not be impacted in a similar way,” said an Orchid spokesperson.

Analysts said the budget proposals indicated no incremental gain for the pharma sector. On the contrary, an increase in excise tax will have a negative impact. “The general rise in service tax and excise duty from 10% to 12 % is likely to raise both input and output costs further,” said Hitesh Sharma, national leader and tax expert, life sciences for consultancy Ernst & Young Pvt. Ltd. “Overall, there is nothing positive from the budget for the industry and the larger peers (such as Sun Pharma and Cadila) are down, so this could have led to the negative impact on stocks,” Patra said.


namrata.n@livemint.com