Drug prices likely to fall by up to 4%

NEW DELHI: Never mind the therapeutic benefit of your anti-diabetic medicine, you will pay less for it, thanks to VAT. Consumers can look forward to a 3-4% reduction in prices of drugs when VAT is implemented from April â€™05. The total benefit to the consumer is likely to be over Rs 900 crore per annum. VAT will also remove the obstacle to introduction of maximum retail price (MRP), inclusive of local taxes for pharmaceutical products. It will facilitate the shift to excise levy on MRP, as against the current levy on first sale price to the stockist. Never mind the therapeutic benefit of your anti-diabetic medicine, you will pay less for it, thanks to value added tax (VAT). VAT will also remove the obstacle to the introduction of a maximum retail price (MRP) inclusive of local taxes for pharmaceutical products. Besides, it will facilitate the shift to excise levy on MRP, as against the current levy on first sale price to the stockist. Consumers can look forward to a 3-4% reduction in drug prices when VAT is implemented from April â€™05. The rationale for this expectation is that the VAT rate on medicines would be 4%, as applicable to essential goods. The existing sales tax rates on medicines across states are 8.5-10%, with the weighted average, after factoring in the rebate, being over 7.5%. The empowered committee of state finance ministers had earlier proposed 4% VAT on medicines as essential goods, and the drug industry and trade are keen that the rate be made applicable to medicines. The overall benefit of a 4% VAT for the Rs 22,800 crore retail pharma market is estimated at over Rs 900 crore. This benefit is to be passed on to the consumer. Post-VAT implementation, pharma companies will be able to claim reimbursement of the sales tax paid on various inputs used for production of bulk drugs and formulations, which will bring down overall production costs. Although the introduction of excise levy on MRP would mean covering the trade margins, the government has already assured the companies that the new levy would come with a 40-50% abatement on the MRP. That is, the 16% excise duty would be levied on the 50-60% of the MRP that includes local taxes (now the proposed VAT), and not 100%. This would reduce the burden of additional factoring in of the huge trade margins existing the sector in the excise levy. In the case of medicines outside price control, the existing trade margins are very high â€” more than 500% in a large number of cases. And, of course, the common benefit of VAT â€” cleaning up of the current practise of â€œoff the book transactionsâ€� under which traders prefer to transact without showing it on the book, thereby avoiding paying sales tax to states. Most FMCG goods have already moved to the MRP-based excise levy system. The pharma sector is among the very few yet to shift to the new system. The government is keen that MRP printed on medicine packs include all taxes so that the consumer knows the price he is required to pay. With the variance in the sales tax applicable in different states, it is practically difficult to include local taxes in MRP. The central governmentâ€™s efforts in the past to include sales tax in MRP met with legal problems. The proposed introduction of VAT will now make the shift to the system of uniform MRP feasible.

Drug prices likely to fall by up to 4%

Never mind the therapeutic benefit of your anti-diabetic medicine, you will pay less for it, thanks to VAT.

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