The Hindu Business Line : Pre-VAT jitters: Drug cos work out plans to allay trade fears

WITH less than a fortnight to go for the implementation of value-added tax (VAT), drug companies are devising different methods to smoothen the transition into the new regime from April 1.

The VAT on medicines is 4 per cent, but the trade has been reluctant to bear the cost of medicines purchased from pharma companies at a higher sales tax rate, a pharma industry representative said.

A trader in Maharashtra, for instance, who purchased medicines at a sales tax rate of 9 per cent, will have to sell them at the VAT rate of 4 per cent, come April.

Although the Government would compensate the traders, the fear of delay in getting the money has had traders slowing down their purchase of medicines from mid-February, the industry representative said.

In an effort to coax pharma stockists and retailers to continue purchasing stocks from companies, about 39 drug companies have agreed to compensate the difference amount to the traders.

"Companies including Sandoz, Lupin, Dr Reddy's, J.B. Chemicals and Ind-Swift Ltd have agreed to compensate the difference amount on the basis of stocks lying with the trade on March 31," said Mr J.S. Shinde, General Secretary of the All-India Organisation of Chemists and Druggists (AIOCD).

Transition problems will be felt for a month as about Rs 5,000 crore worth of inventory lies with the retailers and stockists, he said. Some drug companies have offered to take back the old stocks, while others are offering discounts and free schemes to the traders to keep the stocks, he said.

But tiding through to April will not be the end of VAT-related problems, fears a senior executive with a domestic pharma company. For instance, the AIOCD has called for the implementation of VAT at the first point on all types of medicines and have threatened a stir if that is not the case.

The AIOCD official reasons his organisations' demand, saying: "This will put an end to confusions in selling rate disparity and will prove most convenient for the industry and the trade."

But if VAT is not implemented at first point, then chemists across the country may stop purchasing stocks from companies from April 1, he cautions. At this stage, there is little the pharma industry can do to resolve this issue that is threatening to snowball. A local drug company executive laments that there is still so much uncertainty prevailing over the actual rules along which VAT would be implemented in the States. He hoped that the Government would, sooner than later, sort out the issues raised by the trade, so that drug companies could get on with their business.

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