India’s landmark move towards the next generation of Goods and Services Tax (GST) reforms has sparked concern among key industries.
The worry is that proposed rate cuts could create inverted duty structures, negating the intended benefit for consumers.
According to sources, multiple sectors—including tractors, pharmaceuticals, medical devices, chemicals, fertilizers, textiles, and insurance—have flagged concerns to the Finance Ministry.
The common fear is that if GST on finished goods or services is slashed without corresponding alignment of input taxes, the resulting inversion will block credits, increase compliance burdens, and in some cases, raise costs instead of reducing them.
What is duty inversion?
Duty inversion occurs when the GST levied on inputs is higher than the tax on finished goods or services. In such cases, companies accumulate unused input tax credits, which tie up working capital and require refunds from the government—often delayed.
An tax expert, “Rate reduction, particularly from 12 to 5% may result in inverted duty structure for many products as most of the inputs and services would continue to attract a higher rate of 18%. The companies would typically need to factor the incremental cost while arriving at the revised MRP. One of the ways to address this problem for the Government could be to allow for a refund of accumulated input tax for services as well.”
“Industry has clearly told the Finance Ministry that unless inversion is addressed, rate cuts won’t lead to price reduction for consumers,” a source added.
“Industry has clearly told the Finance Ministry that unless inversion is addressed, rate cuts won’t lead to price reduction for consumers,” a source said.
Insurance sector: Zero-rating as a solution
Another tax expert explained that a full GST exemption for insurance could backfire.
“A complete exemption will lead to a blockage of input GST credit for insurance companies, pushing up their costs. A reduction to 5% may be a better solution. If the intent is to take away GST altogether, the best option would be to extend ‘zero rating’—currently available only for exports and SEZ supplies—to insurance services.”
Pharma’s inversion worry
The pharmaceutical industry, one of India’s biggest export success stories, is staring at a sharper inversion risk.
At present, finished formulations are taxed at 12%, while Active Pharmaceutical Ingredients (APIs) face 18%. If GST reforms push formulations down to 5% while APIs remain at 18%, the inversion gap would jump from 6% to 13%.
“This reform is welcome, but without rate parity between APIs and formulations, it risks squeezing MSMEs and undermining India’s healthcare goals,” an industry expert said.
Impact on patients and MSMEs
Price-controlled drugs: Under the Drug Price Control Order (DPCO), companies cannot freely increase prices. A deeper inversion would erode margins, potentially forcing withdrawal of essential drugs and risking shortages.
MSMEs: Smaller pharma firms already face tight liquidity. Paying 18% GST upfront on inputs while earning just 5% on sales locks up working capital. Refund delays further strain survival.
Exports: Although exports are zero-rated, upfront GST payments on APIs tie up funds critical for research, scaling up production, and meeting international supply commitments.
Chemists flag patient impact
Welcoming Prime Minister Narendra Modi’s Independence Day announcement on GST rationalisation, the All India Organisation of Chemists and Druggists (AIOCD)—which represents 12.40 lakh chemists and distributors nationwide—stressed that medicines are not luxury commodities but lifelines.
“AIOCD members are the last-mile healthcare providers directly interacting with 140 crore citizens, and any increase in medicine bills directly affects patients,” another industry expert said.
They urged the Finance Ministry to ensure that essential medicines regulated under the Drug Price Control Order (DPCO) do not face any additional tax burden, and demanded that most medicines and supplements fall within the 5% GST slab. They also suggested placing medicines for critical illnesses like cancer, kidney and cardiac diseases under the 0% GST slab.
He added that reducing GST will directly ease the burden on millions of patients and families, especially those without health insurance.
Industry’s prescription
The pharmaceutical industry recommends aligning GST rates for APIs and formulations:
- Both at 5% to maximise affordability, or
- Both at 12% to balance revenue needs with efficiency.
- Support measures sought include:
- A fast-track refund mechanism with 15–30 day timelines.
- Interest on delayed refunds to discourage backlogs.
- A special refund window for capital goods like machinery, enabling MSMEs to modernise facilities.
Correcting wider anomalies
Mehta also noted that GST exemptions on hospitals and diagnostics create “embedded taxes” of 5–6% on consumables and equipment, costs that ultimately burden patients. Rationalising these would make healthcare more patient-friendly and efficient.
In step with GST 2.0
The Prime Minister, in his Independence Day speech, emphasised that GST 2.0 will prioritise fixing inverted duty structures to free up working capital, simplify compliance, and boost exports.
“Aligning APIs and formulations under the same slab would directly support this national goal,” he said, adding that parity would make GST reform a genuine enabler of India’s dual objectives—affordable healthcare at home and global pharma leadership abroad.
The Association of Indian Medical Device Industry (AiMeD) cautioned that changing GST rates for medical devices could impact domestic competitiveness if not carefully managed. Most devices now have a 12% GST, while inputs are taxed at 18%, causing an inverted duty structure and margin pressures. AiMeD noted that proposed GST changes—to either 5% or 18%—both present significant risks requiring carefully nuanced consideration.
“For equipment, electronics, reagents, and implants, reducing GST to 5% would enhance affordability and market reach. However, applying a 5% rate to low-margin consumables like syringes, catheters and IV sets would worsen the inverted duty structure, increasing costs for Indian manufacturers and making imports cheaper,” Forum Coordinator, AiMeD said. “Retaining 12% GST for most consumables while allowing 5% for high-value equipment is the most balanced approach.”
He further emphasized that GST policy choices will directly impact patients and consumers as well as manufacturers. “Raising GST to 18% would increase medical device costs for hospitals and households, while a flat 5% GST without refund reforms may create supply risks by discouraging local production. A calibrated structure is therefore essential to ensure both affordability for consumers and sustainability for Indian manufacturers.”
Industry representatives from IRGMA (Indian Rubber Gloves Manufacturers Association) highlighted that nitrile gloves remain a special case, where manufacturers have sought 18% GST due to very high input credit accumulation and low value addition in a highly competitive price-sensitive import-dominated market.
