Local Pharma Manufacturers Decry New VAT Rules

Lobby group claims inputs languishing at ports

The executives of local manufacturing industries spanning several sectors as well as the heads of lobby groups representing them are in an uproar over new tax legislation that would see the 15 percent value added tax (VAT) applied on their imported raw materials.

Manufacturing insiders say several containers filled with inputs for the domestic production of medicines are stranded at ports following the enactment of the new tax rules. Most of these inputs are meant for use in the manufacture of medicines under government procurement processes.

Lawmakers have amended the VAT proclamation to include products and services that had previously enjoyed exemption to the 15 percent tax. Among these are electricity, potable water, telecom services, transport, and e-commerce. The import of raw materials required for the local production of medicines, printing products, and animal feed are also subject to the tax.

The new rules have garnered fierce opposition from the leaders of local manufacturing businesses and their lobby groups, who argue the tax is being implemented unfairly.

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They echoed their concerns during a public consultation with Ministry of Finance officials this week.

“Any medicine is excluded from VAT. Medicine, here, is defined as both the final product and the ingredients used to manufacture medicine. It is a controversy arising from the definition of medicine. The FDA proclamation and the VAT proclamation define medicine as including both the final product and the ingredients. As per this definition, every component or ingredient used to make medicine is medicine. Both the final medicine and ingredients should have been free of VAT. International laws also define ingredients of medicine as medicine,” Dr. Daniel Waktole, president of Ethiopian Pharmaceuticals and Medical Supplies Manufacturers Association (EPMSMA), told The Reporter.

The lobby group argues the implementation of the VAT legislation is flawed.

The VAT proclamation exempts the import of agricultural inputs such as seeds and fertilizer, prescription medicines and medical equipment, and educational materials from VAT.

“The government is implementing the VAT proclamation erroneously. The final product is being imported VAT free, while we are forced to import the ingredients with VAT. For instance, amoxicillin, a final product, is being imported free of VAT. However, we import the ingredients needed to make amoxicillin domestically., but we are told to pay VAT,” said Daniel.

He told officials the discrepancies have led to cargo being stranded at ports.

“Many containers full of medicinal ingredients are currently stuck at ports in Djibouti and other places.. These containers are carrying ingredients we imported for auctions we won from the government,” said Daniel.

He is referring to auctions floated by the state-run Ethiopian Medical Supply Service (EMSS), which recently contracted several pharmaceutical firms to supply it with medical products.

“We never expected the 15 percent VAT tax on the medicines’ raw materials when we won the bids,” said Daniel.

He argued the new tax laws incentivize imports and discourage local production, calling the VAT levy “very damaging” for domestic manufacturers.

“This needs to be corrected. We requested the Ministry of Finance to exclude us from the VAT, and we are waiting for answers. Containers are stuck at ports. The longer it takes, the more the raw materials are damaged,” warned Daniel.

Yared Hirpo, an EPMSMA board member, says the Association was not consulted in the lead up to the VAT proclamation amendment. He says applying VAT to pharmaceutical inputs will lead to untenable hikes in the cost of domestically-produced medicines and ultimately devastate the industry.

“We’ve talked to the Finance Ministry. The officials understand the problem. But since the proclamation was ratified by Parliament, it’s difficult to amend it. The officials say they’ll find a way to exclude pharmaceutical inputs from VAT through an implementation mechanism,” said Yared. “We’re awaiting a response.”

The Association comprises 11 pharmaceutical members and 18 medical supply enterprises. These businesses are part of the domestic pharmaceutical manufacturing industry, which has the capacity to cover 30 percent of the country’s medical demand.

However, bottlenecks and production shortfalls mean the industry covers an insignificant market share.