While the Kerala Government is introducing the VAT from April, 1 and accepting the demands of the drug traders, medicine prices at the retail outlets are likely to come down by around 3 per cent in the state, according to trade sources.

Under the VAT regime, medicines carry Sales Tax of 4 per cent only. Earlier medicines (except for some ST exempted essential drugs like insulin) were charged an ST of 8 per cent and an Additional Sales Tax of 15 per cent of the ST, which comes to 9.2 per cent. With the ST burden, which is normally passed on to the consumers, coming down to 4 per cent, drug prices would come down by 1.5 per cent to 3 per cent in all the categories. The reduction in drug prices would be reflected in the market within one to two weeks, as it would take a few more days to normalize the drug supply, top level office bearers of the All Kerala Chemists and Druggists Association (AKCDA) told Pharmabiz.

The Kerala Government has accepted all the demands put forward by AKCDA, the lone drug traders association in the state, following various rounds of talks held last week between the drug traders, Finance Minister, Chief Minister, Health Minister, Taxes Commissioner and various officials. The state would collect VAT from first point of sale for drugs based on the MRP of drugs instead of multiple taxations at different levels, as decided by the Empowered Committee on VAT. AKCDA had noted that the government could collect Rs 32 crore (4 per cent of 800 crore drug sales in the state) from the first point of sale itself, as just 250 wholesalers account for 95 per cent of drug sales in the state.

The state also has stipulated that tax payable by small traders in the bracket of Rs 10 lakhs to Rs 50 lakhs annual turnover under the VAT system would be reduced from one per cent to half per cent of the turnover. This would be beneficial for the drug traders who opt for the composite scheme (for those who do not buy drugs from outside the state), said sources. The Government also has assured the drug traders to allow them remit sales tax returns on a quarterly basis and to avoid unnecessary inspection and harassment at will by ST inspectors.

Further, the Government has unilaterally withdrawn the cancellation of licenses of 21 wholesale drug traders and retail outlets, allegedly for not dispensing their duty to ensure the availability of essential medicines in violation of the provisions in the Drugs & Cosmetics Act.

Though the wholesalers under AKCDA withdrew their one-month strike on March 16 following an assurance from the state Government to collect VAT from first point of sale for drugs based on the MRP, shortage of medicines was experienced in the state due to the reluctance of the companies to supply drugs at the proposed VAT rate, with debit note for the variation as demanded by the traders. Following this, the Health Minister directed the DCA to inspect the godowns, stockists and retail outlets to assess the situation.

Following this, 21 licenses were suspended last week, including the licenses of a few top level AKCDA office bearers.

Meanwhile, the neighboring state of Tamil Nadu is yet to take a decision on implementing VAT. The state Government had said it would study the prospects of implementing VAT and would adopt a wait and watch policy.