Mumbai: All India Organisation of Chemists and Druggists (AIOCD) has flagged some concerns faced by trade channel over transactions relating to expired and recalled products under the new goods and services tax (GST) norms and sought resolution from the government for those issues.
In a letter to revenue secretary Hasmukh Adhia dated 21 August, AIOCD, a trade body representing about 800,000 chemists and druggists in India, highlighted issues regarding claiming tax credit on expired or recalled stocks within the stipulated time of 18 months and concerns over contradicting regulations under different Acts governing medicine trade.
Mint has reviewed a copy of the AIOCD letter.
AIOCD said under GST, tax claims for stocks returned by retailers have to be made by 30 September following the end of the financial year in which the supply is made. However, the average expiry period for medicines is three years, which means retailers may not be able to avail tax credit on stocks returned to manufacturers as claims could not be filed within the specified time.
GST paid on sales return can be adjusted within a time period of 18 months. If the sales return is done beyond this period the GST paid on such products becomes a cost, said Anita Rastogi, indirect tax partner at PwC India.
“As pharmaceutical products have an average shelf life of three years, and are returned on expiry via the credit note route, the current process under GST may cause some procedural bottlenecks," said Simachal Mohanty, global head of taxation at Dr. Reddy’s Laboratories Ltd.
Also, as per GST norms, a retailer will have to make a reverse sale of the expired or recalled medicines to distributors and raise a tax invoice and the same will be done by distributor to manufacturer. But according to the Drugs and Cosmetics Act, a dealer cannot issue sales invoice with respect to expired medicines, AIOCD said. This is creating confusion for traders.
A provision in the Drugs and Cosmetics Act states that no drug shall be sold or stocked by the licencee (an entity having a license for trading in drugs) after the date of expiration of potency recorded on its container, label or wrapper.
“Under these peculiar circumstances, it is necessary to make special provision for reversal of purchases and tax credits beyond the period mentioned in Section 34 (2) of GST. You shall also appreciate a guiding principle that a genuine tax payer should not suffer. Therefore, we humbly request you to allow us to settle our account with Debit note/credit note system (which was followed before GST implementation)," AIOCD said in the letter.
Before GST, retailers would usually get credit note from distributors or stockists for the value of expired or recalled stocks returned, and then distributors would get a credit note or replacement of stocks from manufacturers.
“The generic rule of 18 months across sectors may not be aligned with the pharma sector because, for example the expired medicines, which typically have a shelf life of three years are only returned by retailers/wholesalers to manufacturer after the elapse of three years. Hence, an exception may be carved out on the basis of the peculiarity of this sector under the newly framed GST provisions, whereby period of 18 months may be extended," Rastogi said.
The issue of stock returns due to recalls and expiry dates is a serious issue and it is expected that it would be addressed by the government, said M.S. Mani, senior director, indirect tax, at consulting firm Deloitte India.
“While the GST legislation has taken care of issues at a broad level, trade issues such as these, afflicting the pharma sector, require redressal as compliances with regulatory requirements and tax laws simultaneously would otherwise become difficult," Mani added.
Under GST, most medicines are taxed at 12%, while life-saving drugs, including insulin, are taxed at 5%.
Retailers and distributors are also concerned about complex paperwork on expired stocks and that lack of clarity may lead to non-compliance of law and financial losses.
A Mumbai-based stockist requesting anonymity said the time and cost of reverse logistics or return of goods would be very high. Expired or recalled stocks account for only 5% of total sales but the paperwork involved is too complex as distributors will have to deal with three types of chemists—unregistered, composition scheme retailers and those registered under GST.
“There is lack of clarity in the trade channel on taxation part and the format of invoice. Also, if sales returns or expiries happen for small retailers who are under Rs20 lakh turnover and not registered for GST, then how would taxation be handled? There is lot of confusion," said Ameesh Masurekar, director at AIOCD-AWACS, market research unit of AIOCD.