Top executives of India’s $37-billion pharmaceutical industry have a new destination on their frequent travel plan – Kanpur. The director-general of the intelligence wing for goods and services tax (GST) in Kanpur has issued summons to drug makers, asking for voluminous data related to supplies for the past year. The companies are being prodded to reverse claims of input tax credit in respect of free samples supplied as part of their promotion efforts.
The executives have to frequent the city to record statements or make submissions before authorities.
GST, the one-nation, one-tax measure that led to the collapse of geographic boundaries within the country for businesses, has also opened up newer horizons – quite literally so – in terms of tax disputes.
Tax authorities are holding manufacturers responsible for loss of revenue at any level. The tax head of a leading pharma company, who did not wish to be identified, said most drug manufacturers have been affected. “It must have been decided to open up investigations in Kanpur, so most cases are here,” he said.
The Indian Pharmaceutical Alliance (IPA) based in Mumbai approached the government with a representation earlier this month. IPA is a representative body of top researchbased drug companies including Sun Pharmaceutical Industries, Cipla and Lupin.
“The law is clear. The government has clarified the provision of law through FAQ. All doubts are removed. In spite of such clarity, when inspectors summon industry and start harassing them, the government ends up inviting the wrath and frustration of the industry. It is a pity the government is unable to claim credit for its reforms,” said DG Shah, secretary-general, IPA.
The current investigation pertains to the popular practice of freebies offered by drug companies. Free samples, buy one and get one free and additional quantities for the same price are the fulcrum of marketing for key sectors such as pharma, FMCG, food chains and retailers. Under the GST law, a company is liable to reverse input tax credit on free samples.
The GST Law Review Committee had said in a report the total consideration paid for such goods should be chargeable to GST and input tax credit should not be denied in such cases, but the issue is yet to be taken up by the GST Council, the apex decision-making body for the tax regime that subsumed central and state indirect taxes.
The Council is scheduled to meet on December 22, but it is not clear whether this issue will figure in the deliberations. The IPA has sought government intervention to halt the ongoing investigation till the issue is taken up and clarified.
“The issue of discounts or incentives offered under various trade schemes is relevant for various sectors, including FMCG and consumer durables, in addition to the pharma industry,” said Sumit Lunker, partner, indirect tax, PwC.
“We understand the issue is being examined by CBIC (Central Board of Indirect Taxes and Customs) and a detailed circular/clarification may be issued in consultation with the GST Council. It might be better to keep these investigations on hold in the interim.”