Ahead of the Goods and Services Tax (GST) Council meet early next month in which the two-rate structure proposed is expected to be discussed, pharma exporters’ body Pharmexcil has appealed for aligning of GST on active pharmaceutical ingredients (APIs) and formulations.
Formulations or finished products at present are levied GST at the rate of 12%, while APIs or raw materials attract 18%. Under the two-rate structure, if formulations move into the 5% slab and APIs remain at 18%, the gap between input and output tax — known as an inverted duty structure — will widen from 6% to 13%. Such a scenario is bound to lock working capital, create refund backlogs and add costs to an industry that operates on thin margins, Pharmaceuticals Export Promotion Council of India vice-chairman Bhavin Mehta.
“If both are taxed at the same rate, the inverted duty disappears, simplifying compliance and encouraging faster pass-through of benefits to patients. Parity could mean both [taxed] at 5% to maximise affordability or both at 12% to protect revenue while maintaining efficiency. Either is better than a 5/18 split,” he said on Monday.
A 5% GST on formulations against 18% on APIs would squeeze margins further and in some cases could force companies to withdraw essential medicines, risking shortages. For MSMEs, the impact will be sharper as they work on tight cash cycles. Blocked credits from paying 18% on APIs while realising only 5% on sales will 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.
Further, DPCO medicines face price caps, leaving no flexibility to absorb higher costs. The export dimension is even more critical. Though exports are zero-rated, the manufacturers should first pay 18% GST on APIs and then wait for refunds leading to money that could instead fund scale-up, research and development or global commitments getting blocked. Ensuring timely working capital cycles is essential to remain competitive internationally, Mr.Mehta said in a release.
Pharmexcil also sought introduction of 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. A special refund window for capital goods like machinery and lab equipment would also free up funds for facility upgrades.
Published – August 25, 2025 08:51 pm IST
