The Pharmaceuticals Export Promotion Council of India (Pharmexcil) has called for harmonising GST rates on both active pharmaceutical ingredients (APIs) and finished formulations to streamline compliance and ease financial strain.

Currently, formulations are taxed at 12 percent, while APIs carry a higher rate of 18 percent—creating what is known as an “inverted duty structure.” Pharmexcil Vice-Chairman Bhavin Mehta warned that if formulations are shifted to a 5 percent bracket without similar relief for APIs, the tax mismatch would balloon, blocking working capital, delaying refunds, and raising costs for an industry already operating on narrow margins.

Mehta recommended resolving this by aligning GST rates for both APIs and formulations—either both at 5 percent for greater affordability, or both at 12 percent to balance revenue and efficiency. Such parity would eliminate the inverted duty, simplify compliance, and accelerate patient benefit realisation.

India is gearing up for the biggest GST overhaul since 2017, with a proposed two-slab system of 5% and 18% aimed at reducing complexity, improving compliance, and boosting consumption. While positive overall, the reform raises serious concerns for the pharmaceutical industry.

Currently, finished medicines are taxed at 12% while Active Pharmaceutical Ingredients (APIs) are taxed at 18 percent. If formulations shift to the 5% bracket and APIs remain at 18%, the inverted duty structure will widen dramatically, locking up working capital, delaying refunds, and raising costs for an industry that already operates on thin margins.

This is especially damaging for MSMEs, which face tighter cash cycles and higher borrowing costs. With DPCO price caps limiting pricing flexibility, companies may struggle to absorb costs—potentially leading to shortages of essential medicines. Exporters, too, would see liquidity trapped in refunds, undermining India’s competitiveness in generics.

Beyond rate alignment, Pharmexcil urged supportive measures for MSMEs, including a fast-track refund process with 15–30 day timelines, interest on delayed refunds, and interim mechanisms like deemed credits or dedicated refund cells. It also highlighted hidden embedded taxes in exempt areas like hospitals and diagnostics, noting that inability to claim input tax credits adds an additional 5–6 percent burden on healthcare costs. Correcting these anomalies would increase overall efficiency in the healthcare ecosystem.