The rollout of GST on medicines was contrary to what the pharmaceutical industry was expecting. Currently, the applicable rates of GST on medicines are basically divided into four brackets: 0%, 5%, 12%, and 18%. The pharma sector had been wishing for nil rate of tax, the GST Council capped GST on life-saving drugs at 5 percent and 12 percent for other formulations. And in the high tax cap that is 18 percent, comes the pharmaceutical products which are made from the Nicotine polacrilex gum. The only medicines which are exempt from GST are human blood and related component, and all types of contraceptives.

The pharma sector occupies a special and peculiar case owing to the medicinal requirements it offers. The pharma industry contributes around 5 percent of GDP. Hence the introduction of GST on medicines ought to have a widespread bearing on the pharma industry as well on the well-being of the patients.

Now that GST has been in place for more than a year, more facets of GST are becoming clear. The key question which comes up is the affordability of the medicines. GST has replaced the gamut of taxes – and mainly of relevance to drugs and medicines, the VAT and excise duty. But what does it mean in the real world scenario?

Positive Impact of GST on Pharma Sector

GST on medicines eliminates the cascading effect of tax which involved multiple taxes which are applied on to a single product. The GST framework would create a common pharma market with equal opportunities towards growth across several states. Due to the uniform tax structure provided by the GST framework, the traditional cost and distribution Model would be replaced by supply chain efficiencies and tax would become neutral.

  • Under the GST framework, the life-saving essential drugs such as Oral re- hydration salts, diagnostic kits for hepatitis and such other life-saving injections fall under the tax bracket of 5 percent.
  • Companies manufacturing dietary supplements, generic/branded formulations and suffering due to heavy excise duty would see better profitability due to a reduction in taxes.
  • Pharmaceuticals companies would find freedom in exploring various strategic supply chain and distribution channel.

Impact of GST on supply chain

There’s a great scope to enhance the supply chain in the pharma sector and bring overall logistics cost down. Under the previous indirect tax system, CST on inter-state transactions at 2 percent was a significant cost which forced companies to have warehouses or depots in each state or union territory where they operate. Under the GST regime, the availability of seamless input tax credit (ITC) even on the inter-state transactions enables companies in employing the hub and spoke model and thereby reducing their logistics cost and improving their profitability.

GST Rate on Pharma Products

Pharma Product GST Rate
Human blood and related components Nil
Contraceptives Nil
Human or animal blood vaccines 5%
Diagnostic kit for hepatitis (all types of hepatitis) 5%
Cyclosporin 5%
Oral re-hydration Salts 5%
Deferiprone or Desferrioxamine Injection 5%
Medicines that are used in bio-chemical systems (including veterinary medicines) and not bearing name of any brand 5%
Medicines or drugs which are specified in  list 3 or 4 of the notification 12/2012- central excise 5%
Formulations which are manufactured from the bulk drugs listed in  list 1 of the notification 12/2012 -central excise 5%
Goods which are not specified elsewhere: 12%
Medicines or drugs which are made by combining two or more constituents for prophylactic or therapeutic uses. 12%
Ayurvedic medicines 12%
Bandages, wadding gauge, and such similar articles 12%
Pharmaceutical goods such as dental adhesion barriers, sterile laminaria etc. 12%
Nicotine polacrilex gum 18%

More Under Goods and Services Tax

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January 2021