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Reckitt & Colman's Dettol in distress.

For the government to be able to attract fresh foreign investment into the country, it is of utmost importance that the existing foreign investment in the country is allowed to ean a fair return on its investment. Dettol's current profitability is certainly a poor attraction for foreign entrepreneurs who may be contemplating investing in Pakistan.

Dettol is a life saving antiseptic drug. It is frequently used in hospitals and homes for prevention/treatment of sepsis and diseases. It is being used all over the world since 1930. Dettol is Pakistan is suffering from serious profitability problem as the price increase allowed to it by the Ministry of Health (MOD) during the last several years is way below the increase in cost of inputs-during the 5 year period from 1985 to 1990 an average of only 2 per cent per annum price increase has been allowed by MOH whereas the general inflation rate in the country has average around 12 per cent. The result is severe erosion of margin to the extent that now the prime cost of the product exceeds its net selling price!

The application for price revision of Dettol was filed by the Company with the MOH, in 1990. Since then numerous reminders - written communications and personal visits at all levels, right up to the Minister of Health, have borne no fruit! In addition to this serious problem of profitability, the following 3 major taxation issues threaten the very existence of the product in Pakistan:-

Custom Duty Refund

Dettol has been registered as a pharmaceutical product under the Drugs Act 1976 and is therefore subject to all the rules and regulations including price fixation, made under this Act. Till 1985, as is the practice with all pharmaceuticals, customs duty and paid on Dettol raw materials was being refunded after their consumption. However, in 1985 Custom decided for declare Dettol as a disinfectant (and not as an antiseptic which the MOH treats it to be) and hence withdrews the facility of duty refund. In 1987 after representations and appeals at various levels of Customs and CBR, the latter declared Dettol as a disinfectant and refused duty refunds.

As a result, Dettol was caught between the devil and the deep sea-on the one hand MOH had declared it to be a drug and in fixing and revising its price did not take into account the customs duty element since, according to it Dettol was a drug and therefore there should be no duties on its raw materials, while on the other hand CBR considered Dettol to be a disinfectant and imposed customs duty accordingly !

In this impossible situation, the Company approached the Federal Ombudsman for resolution of this problem. Following Ombudsman's intervention. MOH in 1989 allowed the company to add the element of duties and taxes to the retaill price. But the duties paid by the company on Dettol raw materials during the period 1985-89, which amount to Rs. 12.8 million, have not been refunded by CBR. The Company has filed a suit in Sindh High Court in June 1992 for the recovery of this duty amount.

Sales Tax

By virtue of its classification as a drug under the Drugs Act 1976, Dettol finished product was not subject to sales tax. In 1981, the Sales Tax Authorised asked the Company to pay sales tax on Dettol since it was a disinfectant'. The Company appealed to the Collector Sales Tax who rightly decided that Dettol was a drug and therefore no sales tax was payable. The position remained unchanged upto 1989.

In October 1989, the Central Excise and Sales Tax Authority issued the Show Cause Notice asking the Company why it should not pay arrears of Dettol sales tax amounting to Rs. 26.79 million for the period July 1981 to September 1989 since Dettol was a disinfectant. After a number of hearings and representations, the department decided against the Company and issued a Demand Notice for payment of sales tax/arrears of Rs. 26.79 million. An appeal against this decision is still pending with Appellate Authorities.

Excise Duty

Since 1961, with the approval of the Provincial Excise Department, the Company has been using a certain process to denature the Rectified Spirit which is used in the manufacture of Dettol. In January 1992, like the proverbial "bolt from the blue", the Company received a letter from the Provincial Excise Department saying that the denaturing process that was being used since the past 30 years, does not render the rectified spirit totally unfit for human consumption and that the department's chemical examiner's report had shown that the strength of denatured spirit was similar to that of rectified spirit and therefore the excise duty at full tariff rate was payable from 1970 upto 1991 by the company, which amounts to Rs. 38.03 million. The excise department issued this demand notice without issuing a show cause notice and without waiting for the Company's reply.

In view of these unusual problems being faced by Dettol's manufacturers, Reckitt & Colman, which are threatening the economic viability of the product, it is imperative that: i) Dettol's case be treated as a "hardship case" by MOH and a special price increase be approved for the product as a matter of urgency to keep it alive; otherwise there is no economic justification for the continued production and marketing of this product and ii) the issues of whether Dettol is a drug or not should be resolved by MOH and CBR once and for all - it is ridiculous when one arm of government classifies it as drug while the other, a disinfectant; the Company caught in the middle, suffers heavily as a consequence since Dettol is subject to strict price control by MOH under the Drugs Act 1976 which assumes no taxes are leviable on registered drugs, while the tax authorities continue to tax the product left, right and centre !

For the government to be able to attract fresh foreign investment into the country, it is of utmost importance that the existing foreign investment in the country is allowed to earn a fair return on its investment. Dettol's current profitability is certainly a poor attraction for foreign entrepreneus who may be contemplating investing in Pakistan.
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Title Annotation:Reckitt and Colman Inc.; antiseptic drug
Publication:Economic Review
Date:Aug 1, 1992
Words:1037
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