GST: What it means for Indian Pharmaceuticals

As India awaits with bated breath for the kick start of the GST (Goods and Services Tax) regime from July 1 2017, we have witnessed a lot of speculations around its impact on our economy in the long run. It is high on the agenda of the new government and its rollout is a priority. The fundamental purpose of GST is to eliminate the long list of taxes levied hopefully paving way towards an easier and more manageable tax regime.

Currently, around 160 countries have implemented GST/VAT (Value-Added Tax) in some from or the other. In fact, more than 40 models of GST itself have been implemented, each with their own characteristics. France was the first country to implement GST in 1954. In the recent past, several countries have followed suite. Countries like Canada and Brazil have a dual-tax model and the GST model proposed by the Indian government is based on the Canadian model. This means a Central (CGST) and a State (SGST) goods and services tax will be levied on all taxable transactions of all goods and services. Our government has finalized the following slab rates:

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Food grains used by common people

5% rate Items of mass consumption including essential commodities
12% & 18% rate Two standard rates
28% rate White goods like Air conditioners, washing machines, refrigerators, etc.

 

The full spectrum of implications of GST is beyond the scope of this article. However, we can attempt to draw attention to its impact on the pharmaceutical industry. The popular forecast is confident about this change the tax regime will be beneficial to the pharmaceutical industry in the long run. The pricing of the finished pharmaceutical products will reduce due to the redistribution of the taxes across all categories thereby leading to lowering the taxes on the manufactured goods.

The Upside:

It will be a huge relief to the business community because according to the new regime, the central tax will be integrated in the GST. Furthermore, inter-state transactions would become tax neutral, making India one single common market no longer divided by state borders. This would lead to higher efficiency in operations and supply chain, reduced manufacturing & transaction costs as well as improved compliance. The common practice of having a state-wise warehouse to avoid central service tax (CST) will be done away with. Simply put, a centrally located large warehouse with proper infrastructure can now cater to the needs of several surrounding states.

GST will enable manufacturers to realize higher margins

“The simplification of supply chain and improved operating environment will alone add 2% to the size of the pharma market,” said Sujay Shetty, leader of the pharma and life sciences at PWC India. In a report shared by Tata Strategic Management Group, it is stated that a 2% reduction in production or distribution cost will add to the profits by over 20%.

Furthermore, the effect on the prices of life-saving drugs will bring relief to the pharmaceutical companies. Currently, specific API or life-saving drugs enjoy the benefit of non-levy of excise duty if they are covered under some specific notification of the Central Excise Law. As the Central Excise Duty will get merged in GST, these life-saving drugs will enjoy tax-free status. They will also be exempted from inter-state service tax in case they are imported.

The Downside:

Several experts are rallying that GST will be beneficial in the long term for the pharmaceutical industry, however many have voiced their concerns about drug prices, exemptions and compliance. Also, there will be a need of changing MOUs (Memorandum of Understanding) across the country since area-wise exemptions (the current practice) will be heavily impacted by the GST regime. Thus, consumers may feel agitated initially because they will have to pay more money.

“The details such as what rate is applicable to pharma is not known, but we think the government will be conscious of the fact that essential medicines should have minimum taxes,” said D.G. Shah, secretary general of Indian Pharmaceutical Alliance.

Recently the news of stockists maintaining a minimum inventory and even returning stocks to the companies are also surfacing. Stockists, distributers and retailers are worried that they may suffer losses on account of a possible mismatch between tax payouts and tax refunds after GST kicks in. This might lead a transient period of shortage of medicine stocks. However, Mr. Ameesh Masurekar, Director, All India Origin Chemists & Distributers Ltd. (AIOCD) insists that it would hardly have an effect at the retail level in spite the practice of the distributors reducing their inventory stock levels to 15 days as opposed to 40 days as practiced regularly.

The Way Forward:

All key stakeholders such as manufacturers, distributors, suppliers and buyers should be fully aware and be well-infirmed about the implications of GMP. Advance preparations is imperative failing which might result to potential business risks and reputational and compliance threats. Companies need to act now to assess the impact of GST on their businesses and functions and develop an action plan and road map for the future. Those who move early are likely to gain an advantage on cost and service levels over their competitors and deliver a better value proposition to the customer.

Mapping IT systems with reference to the revised GST will also be a challenge. Changes to organisational structure mapping in IT systems facilitating transition to GST is the need of the hour.  The change would also require addition/modifications to chart of accounts and tax determination rules, tax masters, for the various purchasing and sales transactions of the companies as suggested by Mr. Suresh Nair, Partner with the Indirect Tax Practice in Ernst and Young.

Hence to avoid chaos, companies need to plan in advance for implementing GST along with the entire ecosystem including IT, packaging and vendors. Those who move early are likely to gain an advantage on cost and service levels over their competitors and deliver a better value proposition to the customer.