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Impact of GST Rate on Life-Saving Drugs and Other Pharma

The impact of GST on the pharma industry will be neutral. Formulations would be charged at 12% under GST while the average rate is 9% under pre-GST laws.

Updated on :  

08 min read.

GST levy on pharmaceutical products can range between different tax rates, i.e. Nil, 5%, 12% and 18%. GST on medicines has left the prices of the same unaffected when compared to the previous regime. This article covers the GST implications for pharmaceutical products and the sector in detail.

With effect from 1 October 2019, the place of supply of services shall be the location of the recipient of services, for the export of research and development services by a person in the taxable territory to a non-taxable territory under contract, related to the pharmaceutical sector of the following:

  1. Integrated discovery and development
  2. Integrated development
  3. Evaluation of the efficacy of new chemical/ biological entities in animal models of disease
  4. Evaluation of biological activity of novel chemical/ biological entities in in-vitro assays
  5. Drug metabolism and pharmacokinetics of new chemical entities
  6. Safety Assessment/ Toxicology
  7. Stability Studies
  8. Bio-equivalence and Bioavailability Studies
  9. Clinical trials
  10. Bio analytical studies

Impact of GST on the price of pharmaceuticals

Medicines fell under Chapter 30 and were liable for excise duty at 6% on 65% of MRP when supplied by a pharmaceutical company. Some medicines were exempt from excise duty. Certain area-based excise duty exemptions were also available. The inputs required for manufacturing attracted 12.5% excise duty. Due to this inverted duty structure, there was an accumulation of CENVAT credit. Additionally, VAT at 4% was charged on the sale of medicines by producers and pharmacies. The table below illustrates the change in the price of medicines pre and post GST:

Particulars

Pre-GST (Rs)

Post GST (Rs)

Cost of manufacturing of one pack of paracetamol (A)

100

100

Excise duty at 6% on 65% of MRP (B)

[(C*65%)/106]*6%

3.9

VAT at 4% (On A+B)

4.16

GST at 5%/12%

5/12

Final sale price

108.06

105/112

The average price of medicine remains the same in comparing scenarios before GST and upon implementing GST.

Some of the other impacts on the price of medicines post implementation of GST are:

Reduction in the overall cost of technology – Under the previous regime, the healthcare sector’s machinery was very costly. Also, the duty charged on the same was not allowed as a tax credit. However, under GST, the IGST component will be allowed as a tax credit.

Improvisation of operational efficiency – Previously, the pharmaceutical industry attracted eight different types of taxes. But, GST has merged all these taxes into one, thereby removing the cascading impact of many taxes. GST will also rationalise the supply chain, thereby improving operational efficiency.

Reduction in transaction cost – GST has subsumed CST (Central Sales Tax). This has led to a reduction in transaction cost, which has led to a reduction in overall manufacturing cost.

Applicability of GST on Pharmaceuticals

GST applies to both sale of medicines as well as medical services provided by medical practitioners.

  • GST on medical services – Health services (humans and veterinary) provided by a medical practitioner, licensed medical or paramedical clinic are charged at Nil rate.
  • GST on hospitalisation – All medicines and medical supplies used at the time of hospitalisation of any individual are charged at Nil rate under GST.
  • Sale of medicines – Sale of medicines attract GST at four different tax rates – Nil, 5%, 12% and 18%. The GST rates with HSN code on various pharmaceutical products is illustrated in detail in the topics below.
  • GST on expired medicines – If medicines reach the expiry date without being sold, the same is returned to the manufacturer via the supply chain. Here, the retailer/wholesaler can opt for any of the two options below:
    1. Treating the returned goods as fresh supply – In this case, the wholesaler will destroy the expired goods, and the return of expired goods will be recorded as purchases by the wholesaler. ITC availed on such goods will be reversed by the manufacturer because no ITC will be available on such goods as they are finally destroyed.
    2. Issue of a credit note for returned goods – The supplier can adjust the tax liability only if ITC has not been availed by the person returning the expired medicines. In case ITC has been availed, the same will have to be reversed.

What is the value of supply to compute GST on medicines?

As per GST, the transaction value is the value of supply. Transaction value is the price paid or payable for the supply of goods or services or both, where the supplier and the recipient are not related parties, and the price is the sole consideration for the supply.

Discounts – As per Section 15(3) of the CGST Act, 2017, the discount can be deducted from the value of supply if given before or at the time of the supply if such discount has been recorded in the invoice of such supply.

Distribution of free samples – The ITC on these samples should be reversed as no tax is paid at the time of distributing such samples to the physician.

What is the GST rate with the HSN code on pharmaceuticals?

The GST rates with HSN codes on various pharmaceutical products is given under Chapter 30.

Medicines and drugs

HS code

GST rate

Animal/Human Blood Vaccines

3002, 3006

5%

Insulin

30

5%

Diagnostic kits for detection of hepatitis

30

5%

Desferrioxamine injection

30

5%

Cyclosporin

30

5%

Medicaments used in biochemical systems with no brand name

30

5%

Oral rehydration salts

30

5%

Drugs including salts and esters and diagnostic test kits, specified in List 1 of this Schedule.

30

5%

Medicines manufactured as per the formulae described in the authoritative books 

30

5%

Formulations manufactured from the bulk drugs as specified in List 2.

30

5%

Nicotine polacrilex gum

30

18%

Below medicines:

  • Menthol and menthol crystals
  • Peppermint 
  • Fractionated / deterpenated mentha oil
  • Dementholised oil (DMO),
  • Spearmint oil
  • Mentha piperita oil

30

12%

All human/animal substances used for therapeutic purposes

3002

12%

Glands and various organs (dried or powdered) for organo-therapeutic uses

3001

12%

Bandage, wadding, gauge and similar types of items

3005

12%

Pharmaceutical products such as sterile surgical catgut, sterile absorbable surgical/dental yarns, sterile tissue adhesives for surgical wound closure etc.

3006

12%

Ayurvedic, Unani, Bio-chemic, siddha or homoeopathic medicines for therapeutic use

3003,3004

12%

Note about GST on import of pharmaceuticals

Import of medicines attracts IGST and customs duty. The following is the bifurcation of taxes applicable:

  • Basic customs duty – 10% on assessable value for customs duty
  • IGST – 18% on the value after adding both the assessable value for customs duty and the basic customs duty Social welfare surcharge – 10%
  • IGST is charged on assessable value plus customs duty which leads to double taxation and ultimately increases the price of the product.

Exemptions GST on medicine

Under GST, exempt supply means supply that does not attract GST or is charged to tax at Nil rate. Currently, the zero rate applies to the below two products-

  • 3002: Human blood and its components
  • 3006 and 4014: All types of contraceptive products
  • Services provided by rehabilitation professionals for activities covered under the Rehabilitation Council of India Act, 1992.
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