State directs VAT payment at MRP at first point of sale

The Maharashtra government on Friday issued a circular directing pharmaceutical companies to pay value-added tax (VAT) at the time of first sale at the maximum retail price (MRP) and not at the actual sale price fixed at the point of sale to the wholesalers.

The object is to collect the entire tax at one point from the manufacturer as the tax will be paid on the MRP.

This is in contravention to the basic VAT norm which specifies tax to be collected at every point of sale, said a drug manufacturer. The directive has also clarified that manufacturers and importers will have to calculate and pay tax on the printed MRP of products given free.

This will ring the death knell for trade discounts given in the form of "free schemes" and "bonus schemes" in the pharma sector. In other words, four per cent VAT will be charged at the manufacturers' point on the basis of the MRP printed on the label for the full consignment transferred to distributor including free products as part of sales promotion schemes.

Kewal Handa, managing director, Pfizer, said that such tax regime will neither help the industry nor the government as the state will lose a larger chunk of its industry units.

The Organisation of Pharmaceutical Producers of India (OPPI), an association of the multinational pharmaceutical companies in India, has protested against the move to impose single point VAT on the MRP of drug products. The association has dubbed the decision as vague and said it would disallow customers to enjoy the benefit of such trade discounts and concessions.

Since sales promotion packs are not included in actual sales, VAT paid on these products cannot be recovered from the buyers, said an OPPI source. The association has moved the state government seeking a review of the decision.

However, Dhara Patel, secretary general, Indian Drug Manufacturers' Association (IDMA), said that the association welcomes the new amendments.

According to Sachin Menon, partner of consultancy firm Ernst & Young, the new norms will lead to double taxation as 85-90 per cent stock of drugs manufactured in Maharashtra are transferred to other states where VAT is charged again on MRP or on the resale price, depending on the law prevailing in those states.