The Government of West Bengal has put in place an alternative to "Value Added Tax" system for drugs on a trial basis in the state from September 1, 2004. As per the new system, retail drug trade will be spared from the burden of levying the turnover tax. Nobody, except the manufacturers and the importers are required to get registered with the Sales Tax authorities under the new system.

The State Government has transferred the Drugs and Medicines to Schedule VIII from Schedule IV of the Act through the West Bengal Taxation Laws Amendment Act, 2004. Due to this, the dealers, while selling the products can mention reimbursement of tax paid on their bills / cash memos and are exempted from paying Turn Over Tax which is levied on Schedule IV items. The tax structure has been made as 7.2 per cent on MRP value of the products.

As per the West Bengal formulae, the tax has been calculated as (MRP - 10 per cent) + 8 per cent tax thereby making it 7.2 per cent of MRP. It is known that the calculation is based on the assumption that the profit margin of the retail trade is fixed at 10 per cent, which is deducted from the MRP to avoid the cascading effect.

According to trade sources, the finance minister of Bengal, who is the chairman of the Empowered Committee, is likely to suggest a similar arrangement for taxation of drugs so as to keep drugs out of VAT list as and when it gets implemented across the country. "The formulae can be worked out only in the case of drugs as profit margins on drugs are fixed by the Drugs Price Control Order (DPCO)," they said.

The Bengal Chemists and Druggists Association has welcomed the move and stated that the 'government decision would put an end to many unknown small problems a dealer had to face'. They felt that through the new system, dealers could face the VAT regime more effectively.

The new sales tax rule is a simplified form of VAT and if proved successful, is likely to be brought to the notice of the empowered committee of state finance ministers, it is learnt.

The State of Bengal is not the only one that is experimenting on various modes of taxation. The Rajasthan Government is also known to have introduced a single point taxation system for drugs recently. The Rajasthan model is more direct where the government is simply charging sales tax on MRP at the first point of sale. Trade sources feel that this model may not be successful in the post-VAT period when the MRP of drugs will include taxes as well as profit margins.