Pharmaceutical Industry Seeks Relief from Rate Inversion

The pharmaceutical industry may get relief on the long-standing issue of Goods and Services Tax (GST) inversion, with recent discussions between companies and the government pointing to a favourable solution as part of GST reforms, people aware of the developments told ET.

Several representatives from the pharmaceutical export industry recently met the GST Council to present their concerns around the inverted duty structure that, the industry claims, has been troubling pharma companies for years.

At present, finished medicines (formulations) attract GST of either 5% or 12% while Active Pharmaceutical Ingredients (APIs) are taxed at 18%. This mismatch results in blocked working capital, refund backlogs, and liquidity pressure across the sector, they said.
The government has assured that the issues will be given due consideration in the reform package.

Industry executives expressed concerns, pointing that the problem is most acute for MSMEs as they work on very tight cash cycles and do not have the financial bandwidth to absorb delayed refunds.

“Inverted duty refunds are time-consuming and often delayed. MSMEs cannot afford such delays as they need regular cash rotation. During the delay period, MSMEs are forced to take loans to meet working capital needs, leading to extra financial burden in the form of interest costs,” said an industry expert. According to this executive, exporters also face additional strain, since they pay 18% upfront on APIs even though exports are zero-rated, leaving critical funds tied up until refunds are processed.   “With essential medicines already under price control, companies have little flexibility to absorb these costs, raising concerns of supply disruptions if the anomaly persists,” an expert who attended the meet told ET.