The Maharashtra government's decision to switch over from its Value Added Tax (VAT) collection system for medicines from first point of sale to multiple point taxation has evoked widespread protest by pharmaceutical traders under Maharashtra State Chemists and Druggists Association (MSCDA).

Drug dealers in the state has to pay the taxes on the actual sale price, instead of tax based on MRP, with effect from July 2007. As per the Maharashtra Value Added Tax (Amendment) Ordinance, 2007, the sales tax department, under the state Ministry of Finance, has abolished levy based on Maximum Retail Price (MRP) for medicine by deleting the explanation IV in clauses, 20 and 25, in section 2 of the VAT Act, 2002.

With the new amendment, the dealers will be entitled to set off at 3.5 per cent in respect of stock of medicine upto the end of June. The retailers having a turnover of less than Rs 50 lakh could opt for the composition scheme under section 42 of MVAT Act, 2002, explains the government notification.

The amendment comes in the backdrop of a recent Supreme Court order upholding the Rajasthan High Court's (HC) verdict, in 2006, on the issue of single point taxation in VAT, according to sources. Rajasthan has mandated the traders to remit sales tax on MRP even before implementation of VAT, which resulted in protest from a group in the industry and the verdict of HC and SC.

The HC ordered that the mandate is a violation of Sale of Goods Act 1930 and the tax should not be levied on MRP basis, as the measure of tax has to commensurate with the point of taxation. The court also ordered the Government of Rajasthan to pay back the tax collected from the medicine traders.

The amendment will block the illicit activities within the trade and will bring in a proper billing system in each stage of the drug distribution chain, according to a wholesaler. However, the government may lose money if the implementation part is not strong enough to audit every retail outlets and hospitals.

The MSCDA, which advocates first point taxation from the beginning, has marked their protest and has passed a resolution against the new system. The organization is planning to strengthen its demand for a uniform tax policy all over the country, said J S Shinde, president, MSCDA and the general secretary of AIOCD.

"We have already taken steps to follow the law after marking our protest to the state government. Our decision is to take up the matter with governments and to seek legal opinion on the matter, as it is a Supreme Court verdict," he told Pharmabiz. The executive committee meeting of AIOCD, to be held on July 25 and 26, will discuss the matter and may take up the issue in national level. However, a Public Interest Litigation (PIL) filed by some generic manufacturers against the first point taxation is under consideration of the Aurangabad High Court, it is learnt.