The Directorate General of GST Intelligence (DGGI) is ramping up its investigation into potential tax evasion within the pharmaceutical sector. Notices have been issued, and many more are expected, targeting companies suspected of underpaying GST. The focus includes GST on brand transfer sales, fraudulent input tax credit (ITC) claims on expired drugs, business support services, and non-payment under the reverse charge mechanism. The anticipated combined tax liability is around Rs 1,000 crore, with Rs 450-500 crore already recovered from pharmaceutical companies.
The DGGI has sent these notices to major pharmaceutical firms, including Sun Pharma, Mankind Pharma, Zydus Healthcare, and Cipla. These companies have yet to respond to inquiries. A central issue identified in the notices is the reversal of ITC for expired drugs. When stockists return unsold expired medicines, the pharma companies write off these products. The GST authorities contend that the ITC on raw materials used for these written-off drugs should be reversed, explained Siddharth Surana, Director at RSM India.
Pharmaceutical companies are scrutinizing the legality of these notices and have approached the government for clarification. Non-compliance with GST demands could lead to legal actions, including fines and penalties. Companies are expected to contest these claims in court, presenting evidence to substantiate that their expenses are legitimate business operations.
Ankur Gupta, practice leader in indirect tax at SW India, noted that legal proceedings will allow companies to argue that promotional activities and related expenses are crucial for business operations and market expansion, thus qualifying for ITC. However, GST authorities may interpret these transactions strictly according to the law, rather than considering the business context. Jignesh Ghelani, Partner at Economic Laws Practice, emphasized that expenses for sales and promotion are typically incurred for business advancement and should be eligible for ITC. The current disallowance is largely based on compliance with the Indian Medical Council Regulations and the Uniform Code for Pharmaceutical Marketing Practices, 2024.
Experts stress that clarity on these issues is crucial to avoid significant litigation involving tax, interest, and penalties for pharmaceutical companies.
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