Indian drugmakers' domestic sales of ready-to-take medicines in January-March could be lower than expected as distributors suspended stocking in anticipation of a new value-added tax system coming into force, analysts and industry members said.

But the revenues of leading drugmakers such as Ranbaxy Laboratories Ltd and Dr Reddy's are likely to be cushioned by exports, which account for a large chunk of their sales, they said.

"We expect lower sales in the quarter to March as the trade was unwilling to pick up fresh stock, given the lack of clarifications on several issues pertaining to VAT," said Rajesh Vora, vice-president at ICICI Securities and Finance Company.

Said another analyst with a local brokerage, "Those with a domestic focus, especially multinational companies, would have been affected."

Value-added tax or VAT will result in a uniform rate across the country, substituting the multiple layers of state and central taxes in place now.

The government had announced in late February, in its budget for the year starting in April, that VAT would go into force from April 1.

But it had to postpone the introduction, as a few states were not ready to make the big change. A panel of state finance ministers is now to meet on April 8 to decide on a new date.

"The uncertainty in the implementation date has affected all of the pharma industry as trade has minimised the purchase of pharmaceuticals. This has resulted in low growth," said Ranjit Shahani, president of the Organisation of Pharmaceutical Producers of India, many of whose members are multinationals.

State governments

Traders are mainly concerned about how soon state governments will reimburse them for the tax they have already paid on inventories that they may sell after April 1 but acquired before that.

Some state governments said they would pay the credit over a period, which could a few months or a few years.

"Given the poor state of finances of the Maharashtra government, naturally, traders were worried about when they will get the credit," said Prasad Danave, a joint secretary of the Maharashtra State Chemists and Druggists Association.

He estimated that most companies would have achieved just 40 to 50 per cent of their March targets for sales to wholesalers.

"We have had two months of upheaval, with trade not willing to take up new stocks as they cleared out old inventory," said a senior executive at a large drug company who declined to be named.

Competitive business

Drug distribution in India, carried out through scores of street-corner retail chemists, is highly competitive, resulting in a wide range of prices.

The VAT rate for medicines is expected to be 12.5 per cent, up from sales tax rates of seven to nine per cent.

Drug prices are therefore expected to rise by five to seven per cent, industry officials said.

But that is unlikely to have much of an impact on demand for medicines, which generally inelastic to price changes, but could potentially dent sales of vitamins and minerals, analysts said.