India’s pharmaceutical sector contributes ~20% of the global supply of generic drugs and is heavily dependent on Active Pharmaceutical Ingredients (APIs). While the recent GST reforms have been welcomed for reducing certain compliance burdens and aligning rates across formulations, the tax treatment of APIs versus finished formulations continues to cause friction.

APIs often face a higher GST rate (18%), while many finished formulations are taxed at 12% or even 5%. This inverted duty structure creates a mismatch, where manufacturers pay more GST upfront on raw material purchases than they can offset on sales. The result? Blocked working capital, reduced margins, and slower cash cycles—a major issue for both exporters and domestic suppliers.

What’s Changed with GST Reforms

• Positive moves:

  • Reduced compliance frequency for smaller pharma businesses.

  • Simplified return filings and input tax credit (ITC) tracking.

  • Lower GST rates on select life-saving drugs and essential formulations.

• Persistent challenge:

  • The inverted duty structure on APIs remains unresolved.

  • Manufacturers continue to accumulate ITC credits, which sit locked until refunds are processed—often with delays.

  • For exporters, this increases cost of production and erodes India’s global price competitiveness.

Why This Matters for the Pharma Ecosystem

1. Working Capital Pressure

   • Companies need to park extra funds in GST payments, reducing liquidity for R&D or expansion.

   • Smaller manufacturers and CROs are especially vulnerable.

2. API Competitiveness at Risk

   • India is already dependent on China for ~70% of API imports.

   • Tax inefficiencies discourage local API production, making “Atmanirbhar Bharat” goals harder to achieve.

3. Export Margins Shrink

   • Global buyers (USA, EU) are highly price-sensitive.

   • Any inefficiency in India’s tax system eats into margins, reducing attractiveness compared to Chinese or European API suppliers.

4. Regulatory Implications

   • If Indian exporters cannot compete on price, global pharma may prefer alternate sourcing hubs, undermining India’s long-term role as the “pharmacy of the world.”

Safeguards & Strategic Actions

1. Policy & Industry Advocacy

• Push for tax rationalization: Align GST rates on APIs and finished drugs to remove inverted duty structures.

• Advocate for faster GST refunds for exporters through industry bodies like IDMA, OPPI, Pharmexcil.

• Seek special incentives for domestic API producers, similar to Production-Linked Incentive (PLI) schemes.

2. Operational Safeguards for Companies

• Backward Integration: Invest in in-house API production to reduce tax outflow and reliance on imports.

• Tax-efficient Structuring: Optimize procurement strategies, e.g., sourcing through SEZs (Special Economic Zones) or availing export-linked refund schemes.

• Working Capital Management: Use supply chain financing and GST credit optimization tools to reduce cash flow impact.

3. Global Supply Chain Strategy

• Diversify sourcing from Vietnam, Korea, and Eastern Europe to balance risks from India-China API dependency.

• Strengthen contract manufacturing partnerships to share tax and cost burdens.

• Build resilience by stockpiling critical APIs to buffer against both tax-related and geopolitical supply shocks.

What It Means for Buyers & Sellers on Platforms like Impurityx

• Buyers: Should be aware that API prices quoted from Indian suppliers may reflect GST inefficiencies, not just cost of production. Buyers may negotiate on landed cost basis, factoring in refund delays.

• Sellers: Must communicate transparently about pricing pressures due to GST mismatches and showcase any efficiencies (like in-house APIs or SEZ sourcing) as competitive advantages.

The Bigger Picture

If unresolved, India risks slowing down its API independence journey, leaving it vulnerable to supply shocks and pricing fluctuations from China. For a sector projected to touch $130 billion by 2030, aligning GST on APIs is not just a tax tweak—it’s a strategic necessity for pharma sovereignty.