04.06.2024: GST probe wing set to widen scrutiny of pharma companies

The Directorate General of GST Intelligence (DGGI) is set to intensify the scrutiny of suspected tax evasion by pharmaceutical companies, over non-payment of dues. In addition to the notices sent already, the DGGI is likely to ask many more companies to explain what it perceives as under-payment of tax by them in the current year, FE has learnt. The notices could pertain to non-payment of GST on brand transfer sales, claiming fake input tax credit (ITC) on expired drugs and for business support services, and non-payment under the reverse charge mechanism, according to official sources.

The combined tax liability that would be mentioned in all these notices is close to Rs 1,000 crore, and so far Rs 450-500 crore has been paid by the pharmaceutical companies. “The payment so far made has been for notices issued in FY23 and FY24; but many companies have not yet paid. We shall be issuing more such notices this year too,” an official said. 

The official said that the notices have been sent to all major drug manufacturers, such as Sun Pharma, Mankind Pharma, Zydus Healthcare, Cipla, among others. Emails sent to these companies by FE didn’t elicit any response.

A common thread in the notices issued is the issue of input tax credit reversal for expired drugs, said Siddharth Surana, Director, RSM India. Typically, when medicines are dispatched to stockists, they come with an expiry date. If the stockists fail to sell these medicines before they expire, they return them to the pharma companies, which then write off these products in their books. “The GST authorities argue that in cases where drugs are written off, the input tax credit on the raw materials used to manufacture these drugs should be reversed,” explained Surana.

Sources say that the companies presently are separately analysing the legality of such notices, and have made representations to the government to clarify their position. In case, pharmaceutical companies do not comply with the GST demands from lower-level authorities, they are likely to face legal actions, including fines and penalties, and to contest these claims, companies are expected to take their cases to courts, said sources.

Source: The FInancial Express

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