Pharmaceutical companies offering freebies may come under GST lens

By: Sachin Dave & Muskaan Sofet

MUMBAI: Pharmaceutical companies offering buy-one-get-one-free schemes or 20% extra for the same price may have to pay goods and services tax (GST) on the extra quantities, raising prospect of the principle being applied to a broad spectrum of consumer products, said people with knowledge of the matter.

The tax heads of firms such as Novartis India, Sun Pharma, Cipla, Lupin have been summoned for meetings with tax officials, they said. The Director General of GST (Intelligence), an arm of the indirect tax department, has begun investigations and sought details of incentives given to distributors, stockists and customers by about 30 companies.


Demand may Lead to Litigation: Experts

The tax authorities want them to either pay GST or reverse input tax credits on the extra quantities.

“We did receive a query from the Director General of GST (DGGST) regarding trade discounts offered to stockists in one jurisdiction,” a Novartis spokesman said. “We have responded to the query and believe that we are in full compliance with the law.”

Cipla, Lupin and Sun Pharma did not respond to ET’s queries.

People with knowledge of the matter said the tax department is set to extend its purview and more companies could get queries and tax notices in the coming months. “The approach is to either induce payment of tax on quantity given as bonus or have reversal of input tax credit,” said one of them. “The view that the tax department holds is that bonus quantity not ‘in furtherance of business’ and tax credit needs to be reversed.”

Experts said the practice has been followed by pharma companies for several years and the demand is likely to lead to litigation.

“Often pharma companies dish out promotional schemes, which is a business decision, and such transactions should typically neither be subjected to GST nor trigger reversals of credit,” said Suresh Nair, partner, EY India. “If demand notices are issued, this could lead to litigation across the industry and could have a pan-India impact.”

It could lead to similar tax demands on such programmes run by the fast-moving consumer goods sector (FMCG) and others, said Pratik Jain, partner, national leader, indirect tax, PwC India.

“This issue is not only limited to pharmaceutical companies but applies in wide spectrum of industries including FMCG, consumer electronics and so on,” he said. “Therefore, this issue should be examined and appropriately clarified by the government.”

Under the earlier tax regime, tax was not applicable on free samples as the law said there needed to be a monetary consideration for goods to be taxed.

However, many states had provisions that allowed the reversal of input tax credit for free samples. This was limited to value-added tax (VAT).

It is understood that many tax officials are equating freebies doled out by pharma companies with ‘gifts’ under the GST framework. There are specific regulations regarding gifts and in some cases GST is applicable or input credits need to be reversed for such items.