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Pharmexcil said the proposed two-slab GST structure could severely impact small businesses and weaken working capital flows
If formulations are moved into the 5 per cent bracket while APIs remain at 18 per cent, the inverted duty gap would widen to 13 per cent.
The apex pharmaceuticals export body of India, Pharmaceuticals Export Promotion Council of India, has urged the Union government to address challenges arising from the proposed two-slab GST structure, warning that it could severely impact small businesses, weaken working capital flows, and threaten India’s competitiveness as the “Pharmacy of the World”.
In a representation submitted to the GST Council through the Central Board of Indirect Taxes and Customs (CBIC) on August 29, seen by News18, Pharmexcil said: “Easing GST inversion duty challenges can strengthen MSMEs and reinforce India’s position as the ‘Pharmacy of the World’—from Pharmexcil.”
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The government is considering a shift to a simplified two-rate GST structure of 5 per cent and 18 per cent. While the move is seen as a bold reform to “reduce complexity, improve compliance, and boost consumption”, the export body cautioned that the pharmaceutical sector could face adverse consequences under the current inverted duty structure.
What are the challenges?
At present, finished medicines are taxed at 12 per cent while Active Pharmaceutical Ingredients (APIs) are taxed at 18 per cent. Highlighting the problem, the council, which is an arm under the ministry of industry and commerce, wrote: “Currently, finished medicines/outputs (formulations) are taxed at 12 per cent, while Active Pharmaceutical Ingredients (APIs)/inputs are taxed at 18 per cent, with existing gap of 6 per cent excess of input rate over output rate.”
If formulations are moved into the 5 per cent bracket while APIs remain at 18 per cent, the inverted duty gap would widen to 13 per cent.
A letter written by Nipun Jain, Chair-DGFT & SME Committee at Pharmexcil, warned, “This process would undoubtedly lock working capital, even more; would create refund backlogs, and add to procurement costs to an industry that operates on thin margins. For MSMEs, the impact is sharper.”
The representation also flagged challenges around refund delays. “The said refund mechanism does not allow input services including bonafide expenses on transportation, clinical trials etc or capital goods. Hence, the refund is limited to inputs only, thus increasing the scope of locking of working capital.”
According to the council, the risks extend beyond industry to patients. “The inverted duty structure under two slab structures in some cases could force companies to withdraw essential medicines, risking shortages and its free availability at competitive prices in the market. Alternatively… some manufacturers may have to absorb this loss, reducing the profitability.”
What are the recommendations?
To resolve these concerns, the body recommended aligning GST rates on APIs and formulations. “The solution is straightforward: to align rates of GST on APIs and formulations on the same pedestal. If both are taxed at the same rate, the inverted duty disappears… This parity could mean both at 5 per cent to maximise affordability, or both at 18 per cent to protect revenue while maintaining efficiency—either is better than a 5/18 split.”
It also proposed support measures such as a fast-track refund system with timelines of 15–30 days, deemed credit/refunds if not granted on time, exclusive refund cells, and relaxation on procedural lapses.
Jain, in the letter, said the reform is critical to sustaining India’s leadership. “By aligning APIs and formulations under the same GST rate, policymakers can reinforce India’s position as the pharmacy of the world, while ensuring the domestic sector remains competitive and financially healthy.”
He added that parity in GST rates is aligned with the government’s broader GST 2.0 vision. “Ensuring APIs and formulations are aligned under the same slab would directly contribute to this national goal—turning GST reform into a true enabler for both domestic healthcare access and global pharma leadership.”
About the Author
Himani Chandna, Associate Editor at CNN News18, specialises in healthcare and pharmaceuticals. With firsthand insights into India’s COVID-19 battle, she brings a seasoned perspective. She is particularly pass…Read More
Himani Chandna, Associate Editor at CNN News18, specialises in healthcare and pharmaceuticals. With firsthand insights into India’s COVID-19 battle, she brings a seasoned perspective. She is particularly pass… Read More
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