India’s pharmaceutical sector, often called the “Pharmacy of the World” for its role in supplying affordable medicines globally, has raised concerns over the government’s proposal to introduce a two-slab Goods and Services Tax (GST) structure. While the reform is being considered to simplify the taxation system, create parity across goods, and boost consumption, industry bodies caution that it could destabilize drug pricing, increase costs for small manufacturers, and weaken export competitiveness.

The 2-slab GST structure can cause more harm than benefits, warned the Pharmaceutical Export Promotion Council of India (Pharmexcil).

The GST Council of India has been working on proposals to introduce a reduced two-slab GST structure, which is said to benefit the goods and services industry. According to Pharmexcil, however, the reform could create unintended consequences for the pharmaceutical sector.

The newly proposed slab may be responsible for impacting small businesses, weakening working capital flows, and threatening India’s competitiveness as the “Pharmacy of the World," said Pharmexcil.

The council, which is a section under the Ministry of Industry and Commerce, wrote, “Currently, finished medicines/outputs (formulations) are taxed at 12 per cent, while Active Pharmaceutical Ingredients (APIs)/inputs are taxed at 18 per cent, with an existing gap of 6 per cent excess of input rate over output rate."

Pharmexcil Vice Chairman Bhavin Mehta explained, "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."

Nipun Jain, Chair-DGFT & SME Committee at Pharmexcil, reinforced this concern in a letter, stating that widening the inverted duty structure in the pharma sector would further strain MSMEs, locking even more working capital and raising procurement costs for businesses already operating on narrow margins.

The council has also asked the government to reconsider the proposal because, "The inverted duty structure under two slab structures in some cases could force companies to withdraw essential medicines, risking shortages and its free availability at competitive prices in the market. Alternatively, some manufacturers may have to absorb this loss, reducing the profitability."

Industry stakeholders outside Pharmexcil have echoed similar concerns. The All India Organisation of Chemists and Druggists (AIOCD), representing over 13 lakh chemists across the country, has also urged the government to reduce GST on all medicines and health supplements to ease the burden on consumers and ensure wider accessibility.

In the letter, Jain also wrote about the solution that can fix this disaster: “The solution is straightforward: align GST on APIs and formulations.”

"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," he added.

Pharmexcil further stressed that without corrective action, India’s reputation as a reliable global supplier of affordable medicines could come under threat, especially in export markets where cost competitiveness plays a key role. As the GST Council debates this pharmaceutical GST reform, the broader impact of GST on medicines in India remains a critical question—not only for industry margins but also for ensuring healthcare access and safeguarding India’s role as the Pharmacy of the World.

(Rh/Eth/ARC/MSM)