Why Medicines May Get Costlier After GST Implementation The GST intended to streamline the indirect tax system in India; however, the pharma sector has experienced both positives and negatives from the implementation of the GST. Mr. Joshi states that while GST has simplified compliance with indirect sales taxes, there have also been several issues that have contributed to increasing drug prices. By understanding these issues, consumers, retailers, and health professionals can better deal with future price fluctuations in the pharmacy industry.
Key Reasons Why Medicines May Get Costlier After GST Tax slab change for pharmaceuticals Prior to GST, drugs had been classified under the lower tax tiers of VAT and Excise. Post-GST, drugs that are considered "luxury" items by the Government will be taxable at 12% GST rate (example: Anti-HIV meds). Whereas, in some instances, devices could be taxed up to 18% GST (example: heart&octopus- stents and syringes). The net effect here is to add an additional layer of tax to the overall cost of medicines.
Loss of tax exemption on some medicines Previously, many life-sustaining and bulk manufactured drugs had:
Excise duty exemption VAT concession State tax subsidy One of the challenges with the GST system is that these types of exemptions were limited or in some instances, removed entirely, causing drug prices to increase.
Increase in production and compliance costs Many Drug Manufacturers Are Experiencing Rising Production and Compliance Costs Due to their GST Compliance Requirements. As part of the GST regime, drug manufacturers must comply with:
Advanced billing systems Filing of a monthly return to GST Matching each top-level inventory with that of each sub-level inventory E-invoicing or submission of invoices via a separate program open to qualifying companies These additional operational and software expenses will eventually increase the price of these drugs due to the increased expenses associated with the production and compliance with the GST, such as increased monthly invoices.
Impact of GST on the pharmaceutical supply chain The pharmaceutical supply chain consists of:
API Manufacturers Drug Formulators Drug Stockists Drug Retailers The application of GST at each level of the supply chain means an "effective" tax at each stage, in one form or another (other than input tax credit), but the GST will eventually increase the price of drugs.
Higher GST Rates on Medical Devices and Equipment Medical devices, such as:
Stents Syringes Laboratory Diagnostic Equipment Surgical Equipment These are all subject to a 12% to 18% GST rate, which can significantly contribute to the overall cost of treatment. Patients are indirectly affected by the additional cost burden associated
Pricing revisions due to MRP re-labelling Companies are faced with the need to adjust their pricing structure as a result of new MRP labelling requirements. The introduction of GST caused companies to:
Revise their MRP Reprint their product label Redistribute their stock These costs are expected to create a temporary increase in the price of many medicines during this transition period.
Refer here: GST on Medical and Diagnostics Services
Does GST always make medicines costlier It depends. For example, in some instances, it will lower or stabilize price levels instead of raise them. For instance, companies that manufacture pharmaceuticals received input tax credits from GST instead of having multiple embedded state and local taxes applied to them. Therefore, the input tax credit will help lower the overall manufacturing cost of pharmaceuticals. Also, since GST provides a uniform tax structure across the country, pharmaceutical companies will no longer be subjected to Cascading Taxation (where multiple taxes were applied to the same product at different stages of production and distribution) between states.
The implementation of GST has also reduced barriers to movement between states and streamlined logistics, therefore allowing companies to save on warehousing and transportation costs. On the other hand, if the total amount of GST applied to a product is higher than what the aggregate tax rate was before GST implementation, or if all the exemptions have now been removed, then these companies will see an increase in their total net tax liability. Thus, the overall impact of the implementation of GST on medicine prices will not be a simple case of uniform inflation across all products, companies, and supply chains.
Refer this: HSN Code and GST Rate for Medicines and Pharmaceutical Products - Chapter 30
Impact on Different Stakeholders For Consumers Higher prices for some drugs (ie. on the higher GST slabs) and a higher total for out-of-pocket healthcare expenses. Some patients will switch to generic drugs because branded medicines will cost more; those patients will bear the cost of long-term medication if they have a chronic illness. For Drug Manufacturers With the introduction of e-invoicing, e-compliance, and ITC matching, Drug Manufacturers have a much greater compliance burden, which means developing new pricing strategies (MRPs) to be aligned with GST slabs as well as reviewing existing pricing models for drugs they manufacture. There will be short-term disruptions during transitional phases (ie. relabelling and stock re-evaluation). Over the long-term, there will be more transparent operations, which facilitates a more efficient supply chain. For Retailers and Wholesalers Retailers and Wholesalers will need to finance inventory until full ITC recovery is possible due to GST applied to stock purchases. Retailers and Wholesalers will have to file and process more complicated returns, resulting in a heavier administrative burden for those companies, and that is in addition to the need for investment in GST compliant billing systems and training. In addition, the reduction in the number of tax checkpoints and the increase in a consistent tax structure for trade between states may make it easier to conduct trans-state commerce than is currently the case." How can price rise be controlled Methods of controlling drug prices through government regulation by the National Pharmaceutical Pricing Authority (NPPA ). Lower taxes by way of reduced GST rates or tax exemptions for life-saving or critical medicines and other products. Encouraging domestic production of APIs (active pharmaceutical ingredients) to lessen reliance on imported APIs from foreign countries. Simplifying the GST refund and input tax credit (ITC) process to help alleviate the burden associated with working capital on pharmaceuticals or their manufacturers. Develop a rationalized GST structure for the various categories of essential medical products. Increase supply chain efficiency to be able to reduce costs in transportation and warehouse storage. Provide incentives or support for essential pharmaceuticals through Government Subsidy Programs, and monitor manufacturers for any unauthorized price increases on MRP. Why Medicines May Get Costlier After GST Implementation Reason Explanation Impact on Price Higher GST slabs on some medicines Shift from earlier lower VAT/excise rates to 5%–12% GST Increase in MRP for many drugs Withdrawal of exemptions Concessions on life-saving and bulk drugs reduced/removed Higher tax burden on manufacturers Higher tax on medical devices Many devices taxed at 12%–18% GST Increases overall treatment cost Compliance and system costs GST returns, software, e-invoicing, audits Companies pass on cost to consumers Supply chain taxation GST applied at multiple value-addition stages Price increase where ITC not fully availed Re-labelling & transition expenses MRP revision, repackaging and redistribution Short-term price hikes Blocked or delayed ITC refunds Working capital gets stuck in GST system Leads to higher pricing to cover cash flow Dependency on imported APIs GST plus customs duties on imported raw materials Costlier manufacturing of medicines
Conclusion By simplifying the tax regime, the Goods and Services Tax (GST) has also changed the way prices for medicine are established in terms of the new tax bracket and the removal of the tax exemption for medicine. Therefore, it is important to understand these aspects of GST in order for consumers and businesses to be able to adapt to the new environment.
Suggested Read: GST Rate on Medicines and Other Pharmaceuticals
FAQs 1. Is GST applied to medical devices? Yes, a lot of medical devices have a GST of either 12% or 18%, which also increases the costs of medical treatment and hospitalization.
2. Does GST benefit the pharmaceutical industry? Pharmaceutical companies benefit from both the input tax credit and simplified logistics; however, they also have increased costs related to compliance.
3. Can you see prices of medicines coming down in the future under GST? Yes, in the event that GST Tax Slabs are lowered, domestic production becomes stronger or the government brings back subsidies or exemptions for medicines, there is a good chance that medicines will see a decrease in price within the next several years.
4. Has the GST raised prices on all types of medicine? Most prices will not fluctuate significantly based on factors such as GST rate changes (for example, when a particular medicine has increased in rate) or removals from 'non-taxed' status; only medications that fall under this category will have fluctuations.
5.What is the rationale for the government's 'encouragement' to provide access to life-saving medications to those in need by having very low or no GST on those medications? The rationale for this is to make it easier for economically disadvantaged people to obtain life-saving medications.
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