Pharmaceutical industry seeks reforms to address inverted GST structure

Pharmaceutical industry associations have welcomed the decision of the Goods and Services Tax (GST) Council to reduce the tax on pharma and nutraceuticals formulations from 12 per cent to 5 per cent and on certain critical drug to zero per cent.

Pharmaceutical manufacturers termed the decision to reduce the GST as a step towards ensuring affordable medicines but demanded that the GST rates for formulations and active pharmaceutical ingredient (raw material) may be aligned to ease financial strain. “While pharmaceutical formulations and nutraceuticals now attract 5 per cent GST, raw materials like active pharmaceutical ingredients, excipients, solvents and packing materials are taxed at 18 per cent, leading to an inverted duty structure. This has wider ramifications like the accumulation of input tax credit, causing cash flow problems to manufacturers, especially the fund-starved micro, small and medium enterprises (MSME),” said Sanjay Sharma, spokesperson for the Himachal Drug Manufacturers Association (HDMA).

“As a significant chunk of the capital is stuck in refunds, the industry is expecting faster provisional refunds to alleviate the pressure on working capital. The prevailing system is causing delays, resulting in capital being stuck in refunds,” rued Dr Rajesh Gupta, HDMA president.

“What has added to our financial woes is the time-bound compliance with the revised Schedule M, requiring significant investments. Further, GST implications on these investments is another concern. The MSME industries, in particular, may face challenges as claims of Rs 2 crore to Rs 3 crore are stuck due to the inverted duty structure,” said Sharma while dwelling upon the challenges of the GST on capital investment.

The existing stock will pose another challenge to the manufacturers. “With a 7 per cent cut in the GST, the manufacturers will lose profit margins on the manufactured stock, which they have started holding,” said another manufacturer. “Companies will have to navigate the complexities of price revisions while ensuring compliance with the GST regulations and the Drug (Price Control) Order. Converting 12 per cent finished goods stock to 5 per cent GST stock is another challenge for the industry. This requires meticulous planning and execution to avoid unnecessary tax liabilities,” said Sharma.

The Drugs (Prices Control) Order, which is a government regulation, sets the maximum prices for essential and life-saving medicines and controls the prices of more than 900 drugs. As the basic price will go up after the recent transition for the pending stock, whether manufacturers will be permitted to increase its price is a cause for concern for the manufacturers.The Laghu Udyog Bharati, Federation of Pharmaceutcal Enterprises, HDMA and other associations have urged the government to address these key concerns.

“Though the government has proposed rate cuts for critical drugs and medical devices, the industry is seeking more comprehensive reforms to address the inverted duty structure issue and provide more relief to support the industry,” added Gupta.