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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.
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:
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.
GST applies to both sale of medicines as well as medical services provided by medical practitioners.
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.
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:
|
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% |
Import of medicines attracts IGST and customs duty. The following is the bifurcation of taxes applicable:
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-