GST blow: Medicines to be get costlier as raw materials to be taxed at 18%

The pharmaceutical industry was hoping the goods and services tax (GST) rate on life-saving drugs would be zero, even as it has been capped at 5 per cent and that of all other formulations at 12 per cent. The rates in the GST regime will be slightly higher than what prevail now.
 
Kanchana TK, director general of the Organisation of Pharmaceutical Producers of India (OPPI), said: “The research-based pharmaceutical industry hoped there would be a reduction in the tax incidence on pharmaceutical products. We believe this reduction would have helped in reducing the medicine prices and impacted patients positively.”

 
In the GST regime, essential drugs that treat malaria, HIV-AIDS, tuberculosis, and diabetes fall in the 5 per cent bracket. Almost all other drugs are in the 12 per cent net.
 

The tax on nicotine is fixed at 5 per cent, while nicotine gum comes in the 18 per cent slab. Cipla, which markets nicotine gum under the Nicotex brand, declined to comment on how the new tax rate would impact the sales of the product.
 
Active pharmaceutical ingredients, or raw materials, will be taxed at 18 per cent.
 
“By and large the tax impact will be neutral on the pharmaceutical industry,” said Hitesh Sharma, leader (life sciences) at consultancy, EY.

 
More than the tax rate, the bigger worry for the companies is the disruption the new tax regime will bring. While companies have geared up for the launch, many distributors and stockists have not even registered themselves to the GST portal, according to a senior executive of a pharmaceutical company.
 
“In many states VAT on pharma products is on maximum retail price, which is on a single point. Due to this the distribution channel does not pay VAT. Thus, for them paying tax, coupled with three returns a month, is a humongous task,” said Kirti Oswal, partner (indirect tax), BSR & Associates. 

 
Distributors and stockists are upset at the loss they might have to incur with the increase in the effective tax rate. The effective tax rate on formulations, now 9 per cent, has been increased to 12 per cent, and trader margins have been built into the tax rate. While companies such as Abbott and Cipla have decided to absorb the losses which traders might incur during the transition period, distributors are unhappy.
 
The All India Chemists and Distributors Federation (AICDF) said its members would have to incur a loss on investment. The organisation said currently the trade channel paid 5 per cent VAT and now it would have to pay an additional 7 per cent but their profit margin would remain the same.

 
Joydeep Sarkar, secretary, AICDF, says: “Under the GST regime, we will not be able to claim refund on the tax for expired products. The government allows it only for up to six months but in pharmaceutical products, the average shelf life of a product is one year.”
 
For dealers, around 10 per cent of the products expire annually.
 
The All India Organisation of Chemists and Druggists (AIOCD) said since the National Pharmaceutical Pricing Authority (NPPA) controlled prices of drugs, companies might not increase the prices.
 
“The increase in tax on most finished formulations is only 1.8 per cent, and companies are likely to absorb the additional burden,” said Ameesh Marsurekar, director, AIOCD.