Tax Tangle: Pharma Sector Pushes for GST Relief Amid Rate Inversion Woes

Image Source: PharmaNET

India’s pharmaceutical industry is once again knocking on the government’s door, seeking urgent relief from the long-standing issue of Goods and Services Tax (GST) rate inversion. With the GST Council expected to meet later this month, pharma companies—especially exporters and MSMEs—are lobbying for structural reforms that could ease working capital stress and restore competitiveness.

Here’s a detailed look at the issue and what’s at stake:

Key highlights from industry discussions

- Finished pharmaceutical products are taxed at 5 to 12 percent, while key inputs like Active Pharmaceutical Ingredients (APIs), excipients, and packaging materials attract 12 to 18 percent GST
- This mismatch creates an inverted duty structure, leading to blocked Input Tax Credit (ITC) and delayed refunds
- MSMEs face the brunt of this liquidity crunch, often resorting to loans to cover working capital gaps
- Exporters pay upfront 18 percent GST on APIs despite exports being zero-rated, tying up critical funds until refunds are processed
- Industry representatives recently met with the GST Council to push for rationalization and faster refund mechanisms

The impact on MSMEs and exporters

Micro, small, and medium enterprises (MSMEs) form the backbone of India’s pharma supply chain. However, the inverted duty structure has created a cash flow bottleneck:

- Refunds for accumulated ITC are often delayed, forcing MSMEs to borrow at high interest rates
- These delays increase operational costs and reduce margins, especially for companies supplying price-controlled essential medicines
- Exporters are hit doubly hard—they pay high taxes on inputs but receive no immediate relief due to refund lags, affecting their global competitiveness

Industry experts warn that if the anomaly persists, it could lead to supply disruptions, especially in critical drug categories.

Proposed solutions under discussion

To resolve the rate inversion, pharma stakeholders have suggested two main approaches:

1. Reduce GST on inputs like APIs, excipients, and packaging materials from 12–18 percent to 5 percent
2. Alternatively, increase GST on finished formulations from 5 percent to 12 percent to align with input rates

Additionally, the industry is urging the government to:

- Set up a dedicated GST refund processing cell for pharmaceuticals
- Allow zero-rating of domestic supplies to exporters to enable seamless ITC recovery
- Incentivize domestic manufacturing to reduce reliance on concessional import schemes

These measures, if implemented, could significantly ease liquidity pressure and encourage investment in new manufacturing facilities.

Policy backdrop and budget signals

The Union Budget 2025-26 laid out a roadmap for strengthening India’s healthcare and pharma sectors, including:

- ₹20,000 crore allocated for private-sector-driven R&D and innovation
- Customs duty exemptions on drugs for rare diseases and cancer
- Expansion of medical education and infrastructure under the Heal in India campaign

However, the budget did not address the GST inversion directly, leaving the industry hopeful that the upcoming GST Council meeting will deliver the relief they’ve long awaited.

Looking ahead

With India’s pharma exports expected to cross $30 billion this year, resolving the GST rate inversion is not just a fiscal housekeeping issue—it’s a strategic imperative. The industry’s ability to maintain supply chains, invest in innovation, and compete globally hinges on a more rational and responsive tax framework.

Sources: Economic Times, Pharmabiz, Express Pharma, EY Budget Alert