Understanding GST Rates and HSN Codes for Pharmaceutical Products in India

The Goods and Services Tax (GST) impacts a broad spectrum of pharmaceutical items, hospital services, and medical devices in India. Tax rates vary from zero to 18%, with essential medications and vaccines generally subject to lower rates to ensure affordability, while products like nicotine gum face higher taxation.

Key Takeaways:

• GST on pharmaceutical products in India ranges from Nil to 18%, with life-saving drugs mostly exempt or taxed at lower rates to enhance affordability.
• The 56th GST Council meeting granted full exemption to 37 life-saving drugs and reclassified most other drugs and medical goods under a uniform 5% GST slab to simplify taxation.
• Medical services have specific GST treatments, with critical care services exempt and non-ICU hospital room rents over Rs. 5,000 taxed at 5% without input credit.
• GST rationalization reduces tax complexity, lowers medicine prices, and improves operational efficiency for manufacturers and suppliers.
• Pharmaceutical imports attract IGST plus customs duties; expired medicine returns require reversal of input tax credit as applicable.

Nil GST Rate on Medicines and Medical Goods

Certain medical goods and medicines are exempt from GST. These include human blood and its components, all types of contraceptives, sanitary napkins, tampons, and a list of 37 specific life-saving medicines. The list of exempted life-saving drugs comprises Gene Therapy, Agalsidase Beta, Imiglucerase, Eptacog alfa (Factor VIIa), Onasemnogene abeparvovec, Asciminib, Mepolizumab, Pegylated Liposomal Irinotecan, Daratumumab (including subcutaneous forms), Teclistamab, Amivantamab, Alectinib, Risdiplam, Obinutuzumab, Polatuzumab Vedotin, Entrectinib, Atezolizumab, Spesolimab, Velaglucerase Alpha, Agalsidase Alfa, Rurioctocog Alpha Pegol, Idursulphatase, Alglucosidase Alfa, Laronidase, Olipudase Alfa, Tepotinib, Avelumab, Emicizumab, Belumosudil, Miglustat, Velmanase Alfa, Alirocumab, Evolocumab, Cystamine Bitartrate, CI-Inhibitor Injection, and Inclisiran.

5% GST Rate on Medicines and Medical Goods

A 5% GST rate applies to various medical products, though this is not an exhaustive list. These items include anesthetics, potassium iodate, iodine, steam, medical-grade oxygen, medicinal hydrogen peroxide, insulin, cyclosporin, desferrioxamine, and oral rehydration salts. Most drugs, medicines (including salts/esters), diagnostic kits, and veterinary/bio-chemic medicaments (with some exceptions) are also taxed at this rate. Diagnostic kits for all hepatitis types, Ayurvedic, Unani, Siddha, and Homeopathic medicaments listed in official pharmacopoeias, organo-therapeutic extracts, heparin, and related human/animal substances, as well as animal blood and vaccines (both animal and human), also fall under this category. Additionally, mixed-dose medicaments for therapy/prophylaxis, medical wadding, gauze, bandages, dressings, plasters for medical uses, sterile surgical/dental sutures, adhesion barriers, ostomy appliances, and dental floss are taxed at 5%. Other items include X-ray photographic plates/film, diagnostic kits, reagents, certified reference materials, feeding bottles and plastic beads, surgical/medical examination gloves, coronary stents, cardiac catheter stent systems, artificial kidneys, glucometers and strips, occlusion devices (arterial/atrial), and assistive/rehabilitation aids for the disabled (such as crutches, wheelchairs, frames, tricycles, braillers, and specified artificial limbs). Dialyzers, micro barriers of artificial kidneys, contact and spectacle lenses, frames, corrective spectacles, medical instruments and appliances (including X-ray, radiotherapy, diagnostic, therapeutic, surgical, dental, and veterinary equipment), mechano-therapy, massage, oxygen, aerosol, and respiratory apparatus, breathing appliances and gas masks (with specific restrictions), orthopedic aids, splints, fracture appliances, and intraocular lenses (excluding hearing aids) are also subject to 5% GST. Medical/surgical/dental thermometers, medical/dental instruments for analysis, and toothbrushes (including dental-plate types) are also included. Finally, all drugs, medicines, diagnostic kits, and formulations for personal use (with certain specified exclusions) are taxed at 5%.

18% GST Rate on Medicines and Medical Goods

An 18% GST rate is applied to a specific set of medical products. This includes items containing nicotine designed for tobacco cessation, whether for oral or transdermal application. Preparations for oral and dental hygiene, excluding common items like toothpaste, tooth powder, and dental floss (but including denture fixative pastes and powders), also fall into this category. Hygienic or pharmaceutical articles made of vulcanized rubber, such as hot water bottles and ice bags, are taxed at 18%, with contraceptives like condoms and diaphragms being exceptions. Laboratory, hygienic, or pharmaceutical glassware, regardless of calibration, is also subject to this rate. Razors and razor blades (including their blanks in strips) are included. Additionally, medical, surgical, dental, or veterinary furniture—such as operating or examination tables, hospital beds with mechanical adjustments, and dentists’ and barbers’ chairs equipped with reclining, rotating, or elevating features—are taxed at 18%.

GST on Medical Services

From July 18, 2022, a 5% GST (without input tax credit) applies to non-intensive care unit (ICU), critical care unit (CCU), intensive cardiac care unit (ICCU), or neonatal intensive care unit (NICU) room rents in hospitals or clinical establishments that exceed Rs. 5,000 per day.

A Nil GST rate is applicable to specific medical services:

• The use of ICU, CCU, ICCU, or NICU rooms.
• Healthcare services provided by a clinical establishment, authorized medical practitioner, or paramedics, except for room rentals (other than those mentioned above) where charges do not exceed Rs. 5,000 per day for a person receiving such services.
• Patient transportation via ambulance, excluding the services specified above.

GST on Hospitalisation

The Authority of Advance Ruling (AAR) in Kerala (2017) and Tamil Nadu (2022) determined that providing medicines, surgical items, implants, stents, and other consumables to patients during hospitalization constitutes a composite supply. This composite supply is exempt from GST under a specific notification (S.No.74 of Notification 12/2017 - Central Tax (Rate) dated 28th June 2017).

Impact of GST on Medicines

Before GST, medicines under Chapter 30 faced a 6% excise duty on 65% of the Maximum Retail Price (MRP) when supplied by pharmaceutical companies, with some exemptions. Inputs for manufacturing were subject to a 12.5% excise duty, leading to CENVAT credit accumulation due to an inverted duty structure. Additionally, VAT at 4% was levied on medicine sales. The introduction of GST has largely stabilized medicine prices, as illustrated by a comparative analysis:

The average cost of medicine has remained relatively stable post-GST implementation. Other positive impacts include:

• Reduced Technology Costs: Under the previous tax system, healthcare machinery was expensive, and duties on it were not eligible for tax credit. With GST, the Integrated Goods and Services Tax (IGST) component is now claimable as a tax credit.
• Improved Operational Efficiency: The pharmaceutical industry previously dealt with eight distinct taxes. GST has consolidated these into a single tax, eliminating the cascading effect and streamlining the supply chain, thereby enhancing operational efficiency.

Determining the Value of Supply for GST Calculation on Medicines

Under GST, the transaction value serves as the value of supply. This is defined as the price paid or payable for goods or services, or both, when the supplier and recipient are unrelated parties, and the price is the sole consideration.

• Discounts: According to Section 15(3) of the CGST Act, 2017, discounts can be subtracted from the supply value if they are provided at or before the time of supply and properly documented in the invoice.
• Distribution of Free Samples: Input tax credit for free samples must be reversed because no tax is collected when these samples are distributed to physicians.

GST on Imported Pharmaceuticals

Importing medicines incurs both Integrated Goods and Services Tax (IGST) and customs duty. The tax breakdown is as follows:

• Basic customs duty: 10% on the assessable value for customs duty.
• Social welfare surcharge: 10% on the basic customs duty (BCD).
• IGST: 5% or 18% on the total value after adding the assessable value for customs duty, basic customs duty, and social welfare surcharge.

GST on Expired Medicines or Drug Returns

When medicines expire before being sold, they are returned to the manufacturer through the supply chain. Retailers or wholesalers have two primary options for handling these returns:

1. Treating returned goods as a fresh supply: The wholesaler destroys the expired items, and the return is recorded as a purchase by the wholesaler. The manufacturer must reverse the Input Tax Credit (ITC) originally claimed on these goods, as no ITC is available for items that are ultimately destroyed.
2. Issuing a credit note for the returned goods: The supplier can adjust their tax liability only if the person returning the expired medicines has not claimed ITC. If ITC was claimed, it must be reversed.

Place of Supply for Specific Medical Services

Effective October 1, 2019, for the export of research and development services related to the pharmaceutical sector (from a taxable territory to a non-taxable territory under contract), the place of supply is the location of the service recipient. These services include:

1. Integrated discovery and development
2. Integrated development
3. Evaluating the efficacy of new chemical/biological entities in animal disease models
4. Assessing the biological activity of novel chemical/biological entities in in-vitro assays
5. Drug metabolism and pharmacokinetics of new chemical entities
6. Safety assessment/toxicology
7. Stability studies
8. Bioequivalence and bioavailability studies
9. Clinical trials
10. Bioanalytical studies