Introduction
The Directorate General of GST Intelligence (DGGI) collects, analyzes, and disseminates intelligence regarding tax evasion and fraud related to GST. This time, the pharmaceutical sector is under scrutiny.
An article published in CNBC with the headline – “Pharma sector under DGGI Scanner; about ₹450 crore of GST dues recovered in FY24” – reveals the scope of the investigation. According to the article, DGGI claims that pharmaceutical companies have evaded GST primarily due to:
Brand transfer sales
Claiming fake Input Tax Credit (ITC) on expired drugs
Claiming fake ITC for business support services
Non-payment of GST under the Reverse Charge Mechanism
These are all common business transactions in the pharma sector. Each of these is briefly discussed below.
1. Brand Transfer Sales
Brand transfer sales in the pharmaceutical industry are strategic transactions involving the transfer of ownership, manufacturing, and marketing rights of pharmaceutical brands between companies. Examples include:
Strides engaging in multiple brand transfers to optimize its portfolio
Sun Pharma acquiring Ranbaxy Laboratories, including its brands and product lines
AstraZeneca partnering with Serum Institute of India for distribution of its COVID-19 vaccine
Such transactions are common in the pharmaceutical sector. Where brands are marketed or licensed to other companies, such activities are classified under Schedule II of the GST Act as supply of services.
2. ITC on Expired Drugs
The GST Authorities have clarified procedures for returning expired drugs or medicines. The procedures differ based on the GST registration status of the returning party:
For Registered Persons (excluding composition taxpayers):
Can treat the return as a fresh supply and issue a tax invoice, or
Return goods via a credit note issued by the supplier
The manufacturer/wholesaler may claim ITC or reduce output tax liability (subject to ITC conditions)
For Composition Taxpayers:
Must return goods with a bill of supply
Must pay tax at composition rate
No ITC is available for the recipient
For Unregistered Persons:
Can return goods using any commercial document
No tax charged
Additionally, if a manufacturer destroys expired goods, they must reverse ITC availed on the return supply, not the ITC used during the initial manufacture.
3. ITC for Business Support Services
This is a long-standing area of dispute between taxpayers and GST authorities.
What qualifies as Business Support Services?
Promotional schemes
Incentives offered to franchisees, distributors, wholesalers, or medical practitioners
This issue has been raised multiple times before AAR (Authority for Advance Rulings). Most rulings state that ITC is not allowed on such promotional or marketing items, as they are considered gifts, which are ineligible for ITC under Section 17(5)(h) of the GST Act.
Contrasting View:
The Karnataka AAR Bench allowed ITC on goods distributed as incentives for achieving sales targets, observing:
These were provided with conditions, and
Gifts are given without conditions or expectations
This interpretation was central to the Biocon and Alembic Pharma cases, where both companies voluntarily reversed such ITC.
A clear Government clarification is needed. When such incentives are directly linked to business promotion and conditions are predefined, they should not be treated as gifts. Moreover, since GST has already been paid on the initial supply value, ITC should be permitted on the goods and services offered as part of these incentives.
Conclusion
In conclusion, the DGGI has raised concerns about alleged GST evasion within the pharmaceutical sector, focusing on:
Brand transfer sales
ITC claims on expired drugs
Business support service-related ITC claims
These are complex, routine business practices in the pharma industry. The issues reflect ambiguities in GST interpretation. It is critical for the Government to:
Address inconsistencies
Provide clear guidelines on GST and ITC applicability
Doing so will ensure compliance, strengthen the integrity of the tax system, and enable fair business practices across the pharmaceutical industry.