Switch to Cloud with

The most accurate and fastest
way to save maximum tax

The Indian pharmaceutical industry is the principal supplier of generic drugs all over the world, with 80% of all AIDS drugs produced in India. The UN has provided licenses to six Indian pharmaceutical labs to make generic anti-AIDS medicine for all the developing nations. Indian pharmaceutical companies manufacture 20% of all generic drugs used around the world

Latest Updates

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

Pre-GST Tax Law on Pharmaceutical Products

The average VAT rate for most of the pharmaceutical products was around 5% and for the formulations was 9%. The excise duty charged on pharma products was 12.5%. To be fair though, the government provided relief on excise to pharmaceutical product manufacturers by introducing excise-free manufacturing zones.

Prior to the introduction of excise-free manufacturing zones, 40% of the pharmaceutical product manufacturers were located in Gujarat. Excise-free zones were a crucial step in providing relief to small manufacturers in remote places to be competitive in the national market. Manufacturers operating from excise-free manufacturing zones had to pay excise at the rate of 1.5% in comparison to the 12.5% from every other manufacturer of pharmaceutical products.

In most of the states, the VAT on the pharmaceutical products was charged on the maximum retail price and was charged at a single point. Therefore, the distribution channel did not pay any tax or file tax returns. Payment of timely taxes and filing 25 returns is a daunting task for the distribution channel.

GST Rate on Pharmaceutical Products

NIL 5% 12%
Human blood and its components Animal or human blood vaccines All goods not specified elsewhere:

Medicines made by mixing two or more constituents for therapeutic or prophylactic uses.

(including Ayurvedic medicines)

All types of contraceptives Diagnostic kit for all types of hepatitis Medicines made by mixing two or more products for therapeutic or prophylactic uses.

(including Ayurvedic medicines)

Cyclosporin Wadding gauge, bandages, and similar articles
Oral Rehydration Salts Forms or packing for retail sale regarding surgical, dental or veterinary purposes
Desferrioxamine Injection or Deferiprone Pharmaceutical goods specified such as sterile laminaria, dental adhesion barriers etc.
Medicines (including veterinary medicines) used in bio-chemichal systems and not bearing any brand name
Drugs or medicines specified in the list 3 or 4 of notification 12/2012- central excise
Formulations manufactured from bulk drugs listed in the list 1 of notification 12/2012 -central excise

Impact of GST Rate on Pharmaceutical Industry

Most of the drugs mentioned under the 5% bracket are used to cure malaria, HIV-AIDS, tuberculosis, and diabetes which were previously charged VAT around 4%. Nicotine polacrilex gum is the only pharmaceutical product to be charged at the rate of 18%. Cipla, the brand which produces nicotine gums, will probably be impacted from the rate fixed at 18%.

No clarification has been provided by the government on the issue of manufacturers operating in excise-free manufacturing zones paying more tax under GST. Most of these manufacturers are competitive in the pharmaceutical industry is due to the excise benefit as they are situated in remote places.

Earlier, Ayurvedic drugs or medicines were charged an average VAT of 4% and excise of 1.5% due to the excise free manufacturing zone benefit. Under GST, Ayurvedic medicines get costlier as they would be taxed at the rate of 12%.

Since the distribution channel was not involved in the payment of tax and filing tax returns, they will now need to get registered and file the minimum 37 returns annually as required under GST. A lot of the times, medicines are provided without bills in India. GST would curb such practices as providing medicine without the bill would not be beneficial for anyone in the distribution chain.

The government needs to still provide clarification on the inclusion of the current benefit for the manufacturers under excise for operating from the excise free manufacturing zones. The pharmaceutical industry is also asking for more information on the implementation of GST on the MRP of pharmaceutical products.  

Simplify Your GST Filing & Invoicing

Get Trained & Try Cleartax GST Software for FREE

Start Free GST Software Trial & Training

Use ClearTax to Match & Claim

10% Provisional ITC Accurately Before Filing

File Now