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  • Writer's pictureRFMLR RGNUL


The following piece has been co-authored by Ms. Venu Parnami Tuteja, Assistant Professor of Law at Amity Law School, Delhi and Mr. Ankit Purohit, advocate.

Image by Steve Buissinne from Pixabay


Pharmaceutical Industry is one of the major industries in India. It has reached the distinction of being world’s third largest industry in terms of volume of production; in terms of value, it is ranked at fourteen.[1]

The current GDP rate in the Indian Healthcare Sector is 2.2% and the estimated growth trajectory of the Pharmaceutical Industry is at 11-13% for the financial year 2020, as postulated by the investment information agency, ICRA.[2] The INR 1,20,000 crore plus industry has been through a lot of ups and downs in the last five years. It was only last year that a double-digit growth was recorded. Owing to demonetization and the introduction of Goods and Service Tax (GST), the industry had to suffer a huge set back. It has finally started coping up with the same at the rate of 11% as compared to the growth of 15% about 5 years ago.[3]

The present government policies for this sector have been a mixed bag. The beneficial ones include, reduced price of medicines, including anti-cancer drugs and even reduced prices of medical devices, and laying adequate stress on the use of generic drugs.[4] On the other hand, the industry was disturbed by the measures like the implementation of GST.

GST is an indirect tax, which was introduced through the 122nd Constitutional Amendment Act, 2017. It came into force on 1st July 2017, making the GST applicable throughout the country. It replaced almost all the other forms of indirect taxes like VAT, CST, Excise duty, Luxury tax, Entertainment tax, and Service tax etc. GST replaced almost seventeen taxes with one uniform tax. Among these seventeen taxes, only a few were applicable on pharmaceutical sector namely, VAT, Service tax, Octoroi duty, CST, Excise duty, and Custom duty.[5]

A diagram to understand the forms of GST:

Impact of GST

GST is a tax, which is applied on the transaction and the cost is charged at every stage by the manufacturer, the whole seller, and the distributor. GST is imposed on the sale price and not on MRP.[6] GST had a major effect on the different limbs of the Pharmaceutical industry; a few of them are listed below

1. Impact on Manufacturing

The GST which is imposed on raw materials has moved from a bracket of 5% VAT to that of 12% GST, and the cost of many salts used as raw materials in the formation of the medicines has increased to 7%.[7]

2. Impact on Price

The prices of the medicines in the bracket of 12% GST have increased by 2.3%, after the GST-implementation. As per the Drug (Price Control) Order, 2013, the prices of the medicines/drugs which do not fall in the purview of NLEM i.e., National List of Essential Medicines are increased by 10% every April.[8]

By invoking the power given by Para 19 of the Drugs (Price Control) Order, 2013 (DPCO) to the Government, they did not increase the price of the medicines which they were supposed to do by a rate of 2.3% on July 1st 2017.[9] The National Pharmaceuticals Authority (NPPA) in February 2019 also availed these extra ordinary powers granted by Para 19 and brought certain anti-cancer drugs under the price control through trade margin rationalization. A price cap limit was also imposed on stents and on knee-caps in the year 2017.

3. Impact on Consumers

Consider an example to understand how GST has impacted consumers in this sector.

An Active Pharmaceutical Ingredients (API) manufacturer who purchases the raw material at say INR-2000 plus INR-360 @18% GST, if sells the formulation at INR-4000, he will collect extra INR-480 @12% GST. He pays to the Government a sum of INR-480, INR-360 through API manufacturer on the payment of his bill of INR-2360 and INR-120 will be a direct payment.[10] Here GST collected, directly comes from the pockets of the consumer. In this chain the manufacturer, dealer, or even the retailer does not pay any tax.

High custom duties have a huge adverse impact on the cost of the product, which in-turn increases the cost of healthcare made available to the consumer through the scheme introduced by the Government named Ayushman Bharat (PMJAY).[11]

There is an additional issue, which the government must address, that of the custom duty and surcharge. The smuggling of the low-bulk high-value medical devices, on which custom duty is imposed, via the neighbouring countries of Bhutan, Myanmar, Sri Lanka and Nepal where the same are available at a lesser price than India.[12] Not only does it result in the revenue loss for the country, but also leads to inadequate services being provided to the patients without any service guarantees. To resolve a similar problem, China reduced the custom duty from 4% to 3.3%, which in turn, increased the competition in the market.[13]

Another problem faced is that the custom duty on spare parts of the medical equipments is at much higher rates than the equipment itself. For example, the roller pumps in the heart and lung machine attracts basic custom duty of 10% and GST is of 18%, whereas the machine itself has the custom duty of 7% and 12% GST.[14]

Another example can be of contact lenses. A person who uses contact lenses has to pay less GST on the same but pay more on the solution used to clean it. GST on contact lenses is 12% and the solution attracts 18% GST.[15]

4. GST Trials and Samples

As for the determination of the effectiveness of the product, it is essential to conduct trials and usage of samples. So for that, it is important for the Government to make them tax free (GST free). Rather, it should be considered as a business expense.

5. Tax Incentive on Exports

Export is one of the huge reasons for the growth of any economy. During the past two to three years, the export performance has declined, thereby impacting the balance of trade. Government should introduce export incentives, which should be treated as a deduction from direct tax, this may attract investments in specific niches of this sector like, the manufacturing of medical equipments.


NITI Aayog had requested the Government to impose higher taxes on tobacco, alcohol, and unhealthy food in order to refurbish the public and preventive health system. But this could not find its way into the financial budget this year. Even though there was fund allocation done for the preventive oncology, diabetes and hypertension, chronic disease like kidney failures, which currently affects almost 15-17% of the total population,[16] found no mention therein.

Due to such a lack in preventive measure, diseases like cancer are only diagnosed upon reaching the terminal stages.[17] The insurance policies available in India cover only a part of the treatment, which in turn results in patients opting out of the medical procedure, because they are unable to cope-up with the cost of treatment.

Increasing GDP can never be a solution for guaranteeing a robust healthcare industry in the country. The Government has to take further steps like rationalizing taxes on medicines, medical equipments, and the trials etc.

To sum up, a strong, independent and empowered regulatory system with experts, resources, and infrastructure is required.[18]

[1] Mrinal SK & Rao J., Role of GST in Indian Pharma Sector, Open Access Journal of Pharmaceutical Research, (May 29, 2019, 06:45 PM)

[2] PTI, Indian pharma industry to grow at 11-13 pc in FY2020: Icra, The Economic Times (July 04, 2019, 08:37 PM),

[3] E Kumar Sharma, BT Buzz: What Modi 2.0 could mean for the Indian pharma industry?, Business Today (May 29, 2019, 06:29 PM),

[4] id.

[5]Supranote 1

[6] Supranote 1

[7] Supranote 1

[8] Supranote 1.

[9] Supranote 1

[10] Supranote 1

[11]Rationalize Taxes & Duties in Budget 2019-20: MTaI, BioSpectrum (June 10, 2019),


[13]Supranote 11

[14]Supranote 11

[15]Supranote 11

[16] T.S. Ravikumar & Georgi Abraham, We need a leap in healthcare spending, The Hindu (Feb. 07, 2019, 12:15 AM),

[17] id.

[18] Supranote 3


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