VAT and import duties on medicine

Published on 24th May 2005

\"In this world nothing is certain but death and taxes,\" said Benjamin Franklin. However, what was not apparent in earlier times was that taxes can contribute significantly to death. One of the most problematic aspects of the 21st century is that more than half of the world’s population lacks access to basic medicine. Shamefully, taxes on medicine are part of the cause, and as a result, millions of people die from diseases that are entirely preventable and curable.

While foreign aid to poor countries has increased in recent years and the price of many drugs has fallen, access to medicines and devices has not increased greatly. There are a number of factors that prevent access to essential medicine and governments can solve some of these without much difficulty. In a paper recently produced by Roger Bate, Richard Tren and myself, we examine the role that tariffs, domestic taxes, and regulatory requirements pose on access to essential medicine in developing countries for the major communicable diseases, namely HIV/AIDS, Malaria and Tuberculosis.

Among the 53 developing countries examined, import tariffs ranged from zero in Brunei and Malaysia to a high of 20 per cent in Nigeria. However, this average tariff masks the tariff peaks that occur in some countries. For instance, Morocco charges a tariff of 50 per cent on bandages, gauze strips and plasters. Until recently, India charged a tariff of 42 per cent on most pharmaceutical products. Similarly Bangladesh, Mexico, Thailand and Zimbabwe imposed tariffs in excess of 20 per cent on some pharmaceutical products. Elimination of these taxes would increase access to medicines and could save thousands of lives across the developing world.

In our analysis we find that there is a uniform relationship between tariffs and access to essential medicine. Increasing tariffs by one percentage point reduces access to medicine by one per cent and reducing tariffs increases access commensurately. This means that millions of people are denied access to essential medicine by a seemingly negligible increase in tariffs.

In the 18th century Benjamin Franklin said, \"No nation was ever ruined by trade\" and a World Bank study of the modern world shows that his statement remains true. The study estimates that if we were living in a tariff-free world, income around the globe would increase by $832 billion as a result of increased trade in all goods. The Bank claims that most of these gains ($539 billion) would flow to developing countries. Removing the tariffs and taxes on medicine and other essential medical inputs would improve conditions even more as it would increase access to life-saving products.

The burden of tariffs is further exacerbated by the impact of value added taxes. VAT ranges from zero in Brunei to 19 per cent in Peru. Many countries also impose other charges and duties on medicine that are not easily explained. For instance, Kenya imposes an 8 per cent port charge, a 1 per cent clearance and freight charge and a 2.75 per cent charge for pre-shipment inspection. Similarly, the West African Economic and Monetary Union (WAEMU) member states charge a 1 percent statistical tax and a 1 per cent community solidarity levy.

Only 10 per cent of Nigerians have access to essential medicines while taxes and tariffs on imports total 28 per cent. In Brazil only 40 per cent of the population has access to essential medicine and their government imposes a combined tax and tariff burden of 29 per cent, thereby reducing access for the poorest members of the population. In Uganda approximately one-third of the population does not have access to essential medicine. Their taxes and tariffs add an additional 31 per cent to the price of pharmaceutical products, which possibly helps explain why the life expectancy of Ugandans is a mere 46 years.

The South African government has decreased the level and variation of our tariffs considerably and the average tariff applied to pharmaceutical goods entering our borders is now negligible. However, South Africa continues to impose a value added tax (VAT) of 14 per cent on pharmaceutical products. This tax imposes an unnecessary burden on sick people and particularly on the poorest of the poor. For instance, a typical month of antiretroviral treatment costs R586 of which R72 goes directly to government in the form of VAT. This R72 could be used to purchase essential groceries needed to sustain the health of the individual.

Governments impose import duties, either to protect local manufacturers from imports and competition, or to raise revenue, but charge VAT on completed pharmaceutical drugs and medical inputs purely to raise revenue. In some countries, such as India, import duties do protect the local pharmaceutical industry while at the same time imposing costs on inhabitants. However, many so-called infant industries simply never grow up. The duties then merely frustrate competition, reduce innovation, raise the prices of goods to domestic consumers, perpetuate the inefficiencies of local producers, and provide no real long-term benefit to the nation.

As the government for poor and developing country raise a considerable proportion of their budgets from import tariffs they are likely to be reluctant to reduce or remove import tariffs on medicines and medical equipment. However, they need to bear in mind that the fundamental purpose of government should be to improve the quality of life of all their countries’ people and the health of the poorest of them requires special consideration.

Tariffs and taxes on medicines are highly regressive and severely penalise the poorest and most vulnerable sectors of society. In a democratic state, removing them should be both politically popular and feasible. Reducing and removing the taxes and tariffs that keep essential medicines out of the hands of the poorest of the poor should therefore be a priority for the government of developing country, including South Africa’s.

With permission from The Free Market Foundation:

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