Pharmaceutical Industry Calls for Reforms to Address Inverted GST Structure

Pharmaceutical industry associations have welcomed the Goods and Services Tax (GST) Council’s recent decision to reduce the GST rate on medicines and nutraceutical formulations from 12% to 5%, and to levy zero percent tax on certain essential medicines.

While the manufacturers described the reduction as a step toward making medicines more affordable, they urged the government to further align the GST rates on formulations and active pharmaceutical ingredients (APIs/raw materials) to ease financial pressure. Sanjay Sharma, spokesperson for the Himachal Drug Manufacturers Association (HDMA), said, “While a 5% GST is now applied to medicine formulations and nutraceuticals, raw materials such as APIs, excipients, solvents, and packaging materials are still taxed at 18%, creating an inverted tax structure. This has far-reaching consequences, including the accumulation of input tax credits, which in turn causes cash flow issues for manufacturers—particularly micro, small, and medium enterprises (MSMEs) already struggling with liquidity.”

Dr. Rajesh Gupta, President of HDMA, stated, “A significant portion of capital is tied up in pending refunds. The industry is hoping for faster provisional refunds to relieve working capital pressures. The current system is causing delays, resulting in capital being locked in refunds.”

Sharma elaborated, “What worsens the financial strain is the time-bound compliance with the revised Schedule M requirements, which demand significant investment. Additionally, the GST impact on these investments raises further concerns. MSMEs are especially vulnerable, with refund claims between ₹2 crore and ₹3 crore still pending due to the inverted tax structure.”

The existing stock also poses a challenge for manufacturers. One industry representative noted, “With a 7% cut in GST, producers stand to lose profit margins on finished goods that have already been stocked.” Sharma added, “Companies will have to navigate the complexities of price adjustments while ensuring compliance with GST rules and the Drug (Price Control) Order. Transitioning stock from 12% GST to 5% GST requires careful planning and execution to avoid unnecessary tax liabilities.”

The Drug (Price Control) Order, a government regulation, sets maximum prices for essential and life-saving medicines, controlling the prices of over 900 drugs. With recent changes leading to increased base prices for pending stock, manufacturers are concerned about whether they will be allowed to raise prices to offset the impact.

Industry bodies like Laghu Udyog Bharati, the Federation of Pharmaceutical Enterprises, HDMA, and others have urged the government to address these critical concerns. Gupta emphasized, “Although the government has proposed rate cuts for essential medicines and medical devices, the industry is calling for more comprehensive reforms to resolve the inverted tax issue and provide greater support.”