Taxes on Medicines Margaret Ewen Coordinator, Global Projects (Pricing) Health Action International (HAI) Amsterdam

Background High prices are a principal barrier to access to needed medicines Domestic taxes are often the third largest component of the final patient price (after the manufacturers’ price and mark-ups in the supply chain) Andrew Creese reviewed the role of domestic taxes and how they affect access to medicines

Taxation Richer countries raise more tax, as a percentage of their gross domestic product, than poorer countries. Tax revenue averaged 36% of gross domestic product for OECD countries. Examples from lower income countries: 8.5% in Bangladesh, 4.2% in Chad, 11% in Indonesia Direct taxes: levied by governments on income of individuals and corporations. Make up about two thirds of total government revenue in high-income countries Indirect taxes: added to the prices of goods and services (VAT, sales tax). Major source of government revenue in low-income countries Direct taxes are progressive - broadly equitable as the better-off pay more than the poor Indirect taxes are regressive - inequitable as the amount paid on a medicine is a percentage of its price and is the same for everyone, rich and poor

Domestic taxes on medicines in high income countries European countries 2010 Standard VAT % Medicine VAT % Differential VAT % for medicines Norway, Denmark & Sweden 25% Sweden 0% prescription only medicines Finland23%9% Austria20%10% Turkey18%8% Romania24%9% prescription only12% OTC products France19.6%2.1% reimbursed5.5% non-reimbursed Cyprus15%0% USA has state-specific sales tax on medicines ranging from 0% to 7% Some high-income countries do not tax medicines eg. Australia, Japan, Korea Source: PPRI

Domestic taxes on medicines in low- and middle-income countries CountryVAT/sales tax on medicinesOther taxes on medicines Bolivia % Mongolia %6% stamp duty and other fees Philippines % India 2005was 6.5 – 9.8% sales tax, now 5% VAT on most medicines 5 -16% state excise duty 3% national education “cess” Peru % (some meds exempt)Municipal promotion tax 2% Sudan 2006Customs duty 10%, Ministry of Defence tax 1%, Pharmacy career tax 1% and others Tajikistan %, now 0%1-5% sales tax Yemen 20065%Custom’s duty 5% Drug Support Fund Lot 1% Some countries 0% VAT/sales tax on medicines eg. Colombia, Ethiopia, Malaysia, Pakistan Source: HAI price database

Impact of taxes/price changes on access to treatment High-income countries: Review of studies in US showed a 10% increase in patient prices resulted in a 2-6% drop in medicine use and increased use of services for chronic conditions (such as diabetes) UK study on the effects of prescription charge increases showed a 7.5% fall in the per capita use of medicines in those paying charges while access to medicines in the exempt group rose by 1% Low- and middle-income countries: Study in several African countries on insecticide-treated bed nets found that purchases increased by about 27% when tariffs and taxes fell significantly (from 42% to zero for insecticide and from 40% to 5% for netting material).

Impact of taxes/price changes on access to treatment Kuwait - 4% customs duty on medicines abolished in 2003 Kyrgyzstan – VAT and regional sales tax on medicines abolished in 2004 Pakistan – 12.5% sales tax on medicines was abolished in 2003 Peru - sales tax and VAT were waived for a range of cancer medicines and antiretrovirals in 2001 But.....in Peru there was little change in retail prices following the tax removal. Must consider supporting regulation, for example on retail mark-ups, so patients benefit from the removal of a tax

The case for taxing medicines For national treasuries, a tax on medicines offers an often large potential revenue source Raising money on medicines is relatively easy, as record-keeping for prescribed medicines is relatively good Demand is relatively inelastic - at least for some groups of people and some medicines CountryVAT / sales tax Tax on medicines as % total tax revenue China %1.66% Philippines %1.54% Jordan 20094%0.051% UK %0.65%

The case against taxing medicines Essential medicines reduce pain and suffering and improve quality of life and life expectance Taxing medicines which restore and maintain peoples’ health is a tax on economic potential Taxes add, often substantially, to prices. The higher the price of a medicine, the less of it is consumed, particularly by the poor. To ensure an allocation of health care towards those in need, many national health systems provide essential medicines free to patients, with general taxation or social insurance paying the cost.

Healthier ways of raising public revenue Eliminate taxes on essential medicines and recoup the lost revenue by higher taxes on tobacco, alcohol, and unhealthy diet items India: 5% VAT alone yields just under $ 1 billion annually Tobacco consumption reduces life expectancy 6 to 10 years and results in 1 million avoidable deaths per year Excise tax of 38% on tobacco purchases. Doubling tax potentially adds $ 3.1 billion in revenue to government and save 3.4 million lives Savings would allow a complete waiver of VAT on medicines and a $2 billion increase in government revenue Romania: Reported to be introducing a tax on foods high in fat, sugar and salt Revenue from “junk food” tax estimated to be $ 1.3 billion Could be used to eliminate several times over the current 9% VAT on medicines which brings in a mere US$ 200 million on current annual total medicines expenditure of about US$ 2.2 billion.