The move by the pharmaceutical traders to stop purchase of medicines until the confusion arising out of enforcing Value Added Tax (VAT) from April 1 is likely to cause serious medicine shortage in the country in two weeks time.

Trade sources told Pharmabiz that most of the members of All India Organization of Chemists and Druggists (AIOCD) and its affiliated state associations have stopped purchase of drugs from the manufacturers. The traders' demand is to collect tax at first point of sale based on MRP of the drug instead of multiple taxation at different levels.

The single point taxation based on MRP has been successfully implemented in states like West Bengal, Haryana and Rajasthan, and hence that model should be implemented in other states as well, demand the traders.

As Pharmabiz reported earlier, the traders in Kerala were the first to stop purchase of medicines, from second week of February soon after the Kerala budget announced implementation of VAT from April 1, 2005. According to the All Kerala Chemists and Druggists Association (AKCDA) sources, if the State Government is not going to accept their demands, the retailers also would soon join the strike, and the state would face serious medicine shortage within a week.

At present, the wholesalers in Tamil Nadu, Karnataka, Andhra Pradesh have stopped drug purchases, and the situation is same in almost all other states, according trade and manufacturing circles. With the Tamil Nadu Government deciding not to implement VAT immediately as announced in the State Budget on Wednesday this week, the drug traders in Tamil Nadu are likely to soon withdraw from the agitation.

Meanwhile, senior drug manufacturing industry professionals from Mumbai and Chennai said, many companies are now facing a crisis, as the traders are now demanding debit note from the manufactures to ensure uninterrupted supplies. While the demand is for debit note for 12.5 per cent of the value of purchase in Karnataka, it is 6.5 per cent in Tamil Nadu, as against many of the State Governments' assurances to reimburse the difference to the traders (deducting from the earlier LT at a rate of VAT at 4%). Similarly, traders in other states follow the same pattern. However, senior AIOCD sources in South India said, "Many manufacturers are voluntarily giving debit note to ensure uninterrupted supplies."

A M Mohan, convener, AIOCD South Zone and AKCDA office bearer notes, it is practically impossible to implement VAT in Kerala in the present form. Unlike other commodities, the government decides prices of drugs as numerous medicines are under DPCO, margins are pre-fixed, and it is impossible for the traders to maintain data on 5000 odd brands. Kerala has about 1500 dealers, and about 250 of them account for 95 per cent of the drug trade in the state, valued about Rs 800 crore. With the present system, the government is going to collect 24 crore in the first stage of 650-crore odd first purchase, 2 crore from dealers and 6 crore from the retailers. This will necessitate the retailers to maintain registers/ computerization and have to face chaos on different taxes for different brands.

More than 25 per cent of the drug supplies are directly being sent to hospital pharmacies by companies and this may cause evasion of taxes and loss of revenue to the government. The State Government also lacks adequate manpower to man prompt payment by the retailers. AKCDA suggests that the government could collect Rs 32 crore (4% of 800 crore turnover) from the first point of sale itself, as just 250 wholesalers account for 95 per cent of drug sales in the state.