Patients to benefit from GST rate cut, but firms likely to face pressure

GST rationalisation lowers costs for medical consumables and high-end therapies, benefiting patients. However, pharma companies, particularly in biologics, may face margin pressure due to ITC loss

The rationalisation of goods and services tax (GST), announced on Wednesday, directly lowers the cost of everyday medical consumables, and also high-end therapies in oncology and rare diseases, helping reduce out-of-pocket patient expenditure and better adherence to medication. The move, however, may lead to domestic formulation makers, especially in biologics, losing input tax credit (ITC) on high-tax inputs, thereby creating margin pressure.

 

Most medicines, medical devices, consumables, and diagnostics that previously attracted 12 per cent GST have now been brought under the 5 per cent slab. A targeted set of high-cost and rare-disease drugs, covering critical therapies in oncology, genetic disorders and rare metabolic conditions, has been fully exempted (nil GST). Categories like thermometers and instruments for physical or chemical analysis, which earlier sat at 18 per cent GST, now attract only 5 per cent. Even routine consumables such as bandages, dressings, wadding and surgical gauze are now cheaper under the new rate structure. Importantly, the GST Council has also rationalised pharma job-work services contract manufacturing, packaging and related outsourcing that many pharma brands depend on to 5 per cent with ITC, down from 12 per cent. This lowers operating costs for companies using asset-light manufacturing models, and improves efficiency in the contract research and manufacturing services ecosystem. 

 

Mankind Pharma promoter & chief executive officer (CEO) Sheetal Arora said they see a clear boost in demand as the reduction of GST on 33 life-saving drugs and essential medicines to 5 per cent will directly ease the financial burden on patients. “When medicines become more affordable, patients are more likely to opt for newer therapies that may have previously been unaffordable,” he said, adding that the reform is expected to widen patient access, expand market penetration, and stimulate growth in demand across urban and rural markets alike.

 

Shobana Kamineni, executive chairperson, Apollo Healthco, felt that zero GST on health and life insurance is a “masterstroke”. “Reductions on medicines and supplies bring affordable care to every household,” Kamineni said.

 

Jitin Makkar, senior vice president and group head, corporate sector ratings, Icra, highlighted that as health insurance penetration further improves, it will, in turn, benefit the hospital sector, which has already been witnessing increasing demand on the back of higher insurance penetration over the past few years.

 

While the patient stands to benefit, do pharma companies gain?

 

For formulation majors, the move to a uniform 5 per cent GST slab does not change realisations meaningfully, but the bigger gain is clarity litigation on rate disputes effectively ends. “For biologics and specialty drugs shifted to nil GST, the split is clear: imports remain neutral while domestic manufacturers lose ITC on high-tax inputs, creating margin pressure. The silver lining is affordability. Lower treatment costs can unlock demand elasticity in oncology and rare diseases, expanding patient access. Over time, higher volumes may partly cushion the ITC squeeze,” pointed out Ashika Institutional Equity analysts Nirali Shah and Udit Gupta.

 

Monika Arora, partner, Deloitte India, felt that the working capital pressure caused by duty inversion on account of higher rate of 18 per cent on APIs (active pharmaceutical ingredients) and nil or 5 per cent on finished formulations, is addressed by the recommendation to allow 90 per cent provisional refunds on claims arising from such inverted duty structure.

 

Stockists and retailers say that they are awaiting clarity from drug companies on whether they would get discounts or bonus offers for the existing stock. “There is usually a three-month inventory in the channel, and it is impractical to take it back, re-label it and then send it back to the stockist. Therefore, drug companies will most likely incentivise stockists for this interim period through bonus or discounts, so that they take the high-cost drugs,” said an industry insider. A senior official from a drug company said nothing has been decided yet. 

 

Medical equipment-makers feel the reduction will help global competitiveness if refunds on accumulated GST due to the inverted duty structure are processed quickly. “We hope GST refunds will also be extended to services and capital goods, as in countries like Australia, Singapore, and Canada. We also seek a transition period for packaging changes, though we intend to pass on the benefits to consumers through proportionate MRP reductions,” said Rajiv Nath, chairman and managing director (CMD) of Hindustan Syringes and Medical Devices, one of the top three disposable syringe-makers in the world. Nath is also the forum coordinator of medical devices industry body Association of Indian Medical Device Industry (AiMeD).

 

Interestingly, had the GST Council exempted all medicines from GST, the cost of drugs for patients would have effectively gone up, analysts pointed out. Under GST rules, when an item is fully exempt, manufacturers and dealers cannot claim ITC on the taxes they pay for raw materials, intermediates, packaging, logistics, or even job-work services. For a sector like pharma, where inputs — APIs, excipients, solvents, packaging films, aluminium foils, cartons, printing, etc. — often attract 12 per cent to 18 per cent GST, the inability to claim ITC would raise effective production costs. “Manufacturers would then either absorb the cost hit (margin erosion) or pass it on to patients through higher base prices. In both cases, the intent of making medicines cheaper would be undermined,” Ashika analysts said.