Pharma companies cheer lower drug prices, API tax gap stirs worry

Experts in the pharma industry and med-tech sectors hailed the GST reforms, noting that these will lower costs of medicines for patients, ease working capital constraints for businesses and strengthen India's competitiveness globally.

However, some of them also raised concerns about the wide gap between the new GST rates for medicines and raw materials, or active pharmaceutical ingredients that go into making the products.

"Amid the positive changes, one concern area that arises is the enhanced working capital pressure caused by duty inversion on account of the higher rate of 18% on APIs as against the reduced rate of nil or 5% on finished formulations," said Deloitte India partner Monika Arora.

Pharma experts say MSMEs will have more challenges ahead with the inverted duty structure, as the gap is at least 13 percentage points now. "Either we should keep the same rate as formulations for API or have an instant refund mechanism," said an industry expert on the condition of anonymity. Also, the refund claims are applicable for only the raw materials for medicines and not for investments in services employed and capital goods. "Sometimes, the input credit refund takes one to two months and it is difficult for small companies to have the capital blocked," he added.

Deloitte's Arora said the concern may be effectively addressed by the government recommendation to allow 90% provisional refunds on claims arising from such inverted duty structures.

Farheen Butt, also partner at Deloitte India, said the GST Council's recommendation to grant 90% provisional refunds for claims arising from the inverted duty structure should help pharmaceutical companies mitigate working capital challenges caused by delays in refund processing.

In sweeping changes, the government on Wednesday reduced the GST rates on several highly priced medicines, such as those used to treat cancer, rare diseases and heart conditions. At least 41 such drugs, several of which are patented and have no generic copies in India, will get cheaper.