India is preparing for the most significant GST reform since its launch in 2017. The move towards a simpler two-slab structure—5 per cent and 18 per cent—is a bold step to reduce complexity, improve compliance, and boost consumption. For pharmaceuticals, however, it raises an important question: how do we ensure this reform supports both patients and manufacturers?
Currently, finished medicines (formulations) are taxed at 12 per cent, while Active Pharmaceutical Ingredients (APIs) are taxed at 18 per cent. If formulations move into the 5 per cent bracket while APIs stay at 18 per cent, the gap between input and output tax—known as an inverted duty structure—will widen from 6 per cent to 13 per cent. This locks working capital, creates refund backlogs, and adds costs to an industry that operates on thin margins.
DPCO medicines already face price caps, leaving no flexibility to absorb higher costs. A 5 per cent GST on formulations against 18 per cent on APIs would squeeze profitability further, and in some cases could force companies to withdraw essential medicines, risking shortages. For MSMEs, the impact is sharper. They work on tight cash cycles, and blocked credits from paying 18 per cent on APIs while realising just 5 per cent on sales strain liquidity. Refund delays add borrowing costs, while GST on capital goods such as machinery or lab equipment often remains stuck. Larger firms can manage, but for smaller units, this threatens growth and even survival.
The export dimension makes this even more critical. Exports are zero-rated, but manufacturers must first pay 18 per cent GST on APIs and then wait for refunds. This ties up cash that could instead fund scale-up, R&D, or global commitments. For a country that is among the world’s largest suppliers of generics, ensuring timely working capital cycles is essential to remain competitive internationally.
The solution is straightforward: align GST on APIs and formulations. If both are taxed at the same rate, the inverted duty disappears, simplifying compliance and encouraging faster pass-through of benefits to patients. This parity could mean both at 5 per cent to maximise affordability, or both at 12 per cent to protect revenue while maintaining efficiency—either is better than a 5/18 split.
Alongside rate alignment, targeted measures can ease MSME stress. A fast-track refund system with timelines of 15–30 days, interest on delayed refunds, and interim support such as deemed credit or dedicated refund cells would provide much-needed relief. A special refund window for capital goods like machinery and lab equipment would also free up funds for facility upgrades now mandated by revised regulations. These steps would safeguard MSMEs, sustain capacity, and ensure uninterrupted supply of affordable medicines.
The reform also presents an opportunity to address related inefficiencies in healthcare. Hospitals and diagnostics, exempt from GST, cannot claim back input taxes paid on consumables and equipment. These hidden “embedded taxes” add 5–6 per cent to costs and ultimately burden patients. Correcting such anomalies, alongside parity in pharma, would make the entire healthcare ecosystem more efficient and patient-friendly.
India’s pharmaceutical industry has consistently demonstrated resilience and global 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.
This call for parity is also in step with the government’s broader GST 2.0 vision, as highlighted by the Prime Minister in the recent Independence Day speech. A central focus of the reform is to correct inverted duty structures across sectors to free up working capital, strengthen export competitiveness, and simplify compliance. 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.