GST on medicines, devices and insurance
The 56th GST Council, on 3 September 2025, approved a two-rate structure of 5% (merit) and 18% (standard), plus 40% for a select few goods and services, effective 22 September 2025. Tobacco products were initially kept on earlier rates and compensation cess. For the health sector the effect was a broad cut to 5% or nil.
| Item | GST before 22 Sep 2025 | GST from 22 Sep 2025 |
|---|---|---|
| Most drugs and medicines | 12% | 5% |
| Thirty-three life-saving drugs | 12% | Nil |
| Three drugs used for cancer, rare and severe chronic diseases | 5% | Nil |
| Various medical, surgical and dental apparatus and devices | 18% | 5% |
| Diagnostic kits and reagents, glucometers, gauze and bandages | 12% | 5% |
| Individual health insurance policies, including family floater and senior-citizen policies | Taxed | Exempt |
Foreign investment in insurers is 100% under the automatic route (Press Note 1 of 2026); see FDI rules. The general GST structure is on GST and customs.
Customs relief on life-saving drugs
Budget 2025-26 proposed adding 36 life-saving drugs to the list fully exempt from basic customs duty and six to the 5% list, with the same relief for bulk drugs used to make them, and 37 medicines to the patient-assistance exemption (PIB, 1 Feb 2025).
Check: The brochure records these as Budget 2025-26 proposals. Confirm the current customs tariff entry for each product before relying on the exemption.
Zones: drug and device parks
Bulk drug parks at Jambusar, Gujarat (2,015.02 acres) and Nakkapalli, Andhra Pradesh (2,001.80 acres) get central grants of up to ₹1,000 crore each for shared infrastructure; a third park is in Himachal Pradesh. Device parks in Uttar Pradesh, Madhya Pradesh and Tamil Nadu get up to ₹100 crore each. Status, grant terms and occupancy are on central incentives.
Budget 2026-27 for the sector
Announced on 1 February 2026: Biopharma SHAKTI (₹10,000 crore over five years), a scheme for five regional medical hubs, three new All India Institutes of Ayurveda and a scientific review cadre at CDSCO. Budget 2026-27 left corporate tax rates unchanged; only the MAT rate was cut.
Corporate tax at a glance
Rates are for tax year 2026-27, the first year under the Income-tax Act 2025, which replaced the 1961 Act from 1 April 2026. Effective rates add surcharge and the 4% health and education cess. Treaty rates can be lower where treaty conditions are met. Effective rate = base rate × (1 + surcharge) × 1.04.
| Tax | Rate or rule | Note |
|---|---|---|
| Corporate tax: concessional regime (s.200) | 22% + 10% surcharge + 4% cess = 25.168% effective, whatever the level of income | Optional for any Indian company, including a foreign-owned subsidiary. Most deductions and exemptions are given up; MAT does not apply. |
| Corporate tax: normal regime | 30%, or 25% if turnover in FY2024-25 was up to ₹400 crore. Surcharge 7% on income above ₹1 crore, 12% above ₹10 crore; 4% cess | Top effective rate 34.944% (30% band). Deductions and incentives remain available, but MAT applies. |
| Foreign company: branch or permanent establishment | 35% on income other than special-rate income. Surcharge 2% on income above ₹1 crore, 5% above ₹10 crore; 4% cess | Effective 36.40% (income up to ₹1 crore), 37.128% (₹1–10 crore), 38.22% (above ₹10 crore). |
| Minimum alternate tax (MAT, s.206) | 14% of book profit (was 15%) from tax year 2026-27; a final tax for companies in the old regime, with no new MAT credit | Credit built up to 31 March 2026 is usable only after moving to the new regime, up to 25% of the year’s tax (domestic companies). |
| 15% regime for new manufacturing companies (s.201) | Closed to new entrants: only companies that began manufacturing or production by 31 March 2024 qualify | Budget 2026-27 left corporate tax rates unchanged (only the MAT rate was cut) and added no replacement regime; new manufacturers compare s.200 with the normal regime. |
| Dividends paid to a non-resident parent | 20% withholding under domestic law, plus surcharge and cess | Taxed in the shareholder’s hands. Treaties can reduce withholding on dividends, interest, royalties and technical fees, subject to treaty conditions. |
The full treatment is on corporate tax.
Withholding, capital gains, buy-backs and transfer pricing
Domestic-law rates for tax year 2026-27, before surcharge and cess unless stated. The applicable treaty may reduce withholding where its conditions are met.
| Tax | Rate or rule | Note |
|---|---|---|
| Royalties and fees for technical services | 20% on payments to a foreign company, plus surcharge and cess | A lower treaty rate may apply, subject to treaty conditions. |
| Capital gains of non-residents: listed shares | Short-term (s.196): 20%. Long-term (s.198): 12.5% on gains above ₹1.25 lakh | Plus surcharge and cess. Treaty exemptions are open to challenge under GAAR (Tiger Global, January 2026). |
| Capital gains of non-residents: unlisted shares | Long-term: 12.5%. Short-term: at the rate for other income, 35% for a foreign company | Plus surcharge and cess; treaty relief subject to treaty conditions. |
| Share buy-backs | Taxed as capital gains in the shareholder’s hands from 1 April 2026, no longer as dividend | Promoters pay an additional tax on buy-backs under s.68 of the Companies Act 2013. It takes long-term gains, and short-term gains on listed shares, to 22% where the promoter is an Indian company and 30% for any other promoter, including a foreign parent (before surcharge and cess). |
| GST (from 22 September 2025) | Two main rates, 5% (merit) and 18% (standard), plus 40% for a select few goods and services | Approved by the 56th GST Council on 3 September 2025. Tobacco products were initially kept on earlier rates and compensation cess. |
| Transfer-pricing safe harbour: IT services | 15.5% operating margin on cost for software, ITeS, KPO and contract R&D, for taxpayers within the ₹2,000 crore eligibility threshold (raised from ₹300 crore) | Budget 2026-27; notified with the 2026 rules. Approval is automated and the option can run for five years. |
The contract R&D safe harbour is relevant to pharma capability centres and CDMO research units; see transfer pricing and withholding and capital gains.
What to check next
- Reclassify every SKU under the post-September 2025 GST schedule and check which life-saving drugs are at nil.
- Confirm the customs tariff position for imported life-saving drugs and the bulk drugs used to make them.
- Compare the s.200 concessional regime with the normal regime; the 15% new-manufacturing regime is closed.
- For a capability or research centre, test eligibility for the 15.5% contract R&D safe harbour.
- Model a branch (36.40% to 38.22%) against a subsidiary (25.168%) before choosing the entry vehicle.