IMPACT OF GST ON PHARMA SECTOR

IMPACT OF GST ON PHARMA SECTOR

Goods and Services Tax (GST) is an indirect tax which was introduced in India on 1 July 2017 and was applicable throughout India which replaced multiple cascading taxes levied by the central and state governments. Under GST, goods and services are taxed at the following rates of 0%, 5%, 12%, 18% and 28%. 

Expectations

·         It was expected that GST would have a constructive and beneficial effect on the Pharma sector by streamlining the taxation structure since 8 different types of taxes are imposed on the Pharmaceutical Industry today. An amalgamation of all the taxes into one uniform tax was thought to ease the way of doing business in the country, as well as minimising the cascading effects of manifold taxes that is applied to one product. Since the distribution channel was not involved in the payment of tax and filing tax returns, they will now need to get registered and file the minimum 37 returns annually as required under GST. A lot of the times, medicines are provided without bills in India. GST would curb such practices as providing medicine without the bill would not be beneficial for anyone in the distribution chain. Thereby GST introduction was intended to help the Pharmaceutical companies in rationalising their supply chain. The biggest advantage for the companies was thought to be the reduction in the overall transaction costs with the withdrawal of CST (Central Sales Tax). The manufacturing cost was expected to be lowered with the introduction of GST.

·         Another benefit likely to accrue due to GST is the reduction in the overall cost of technology. Currently, the technical machinery and equipment which are imported into the country by the pharma sector are very costly. Also, the duty which is levied is not allowed as a tax credit under the present tax regulations. However, with GST this scenario might change. Under GST, duty charged on the import of such equipment and machinery would be allowed as a credit.

·         One of the prime concerns for the pharma sector is the inverted duty structure that adversely impacts the domestic manufacturers. The cost of inputs is much higher than output, i.e., the raw materials are more costly in terms of duty than the finished product itself hence depressing investments from the manufacturers. For addressing this issue, the GST structure proposes either to dispose of the inverted duty structure or bring in a refund of the accrued credit. If this is implemented, it would prove to be the biggest advantage for the healthcare sector and would act as a booster for the growth of healthcare industry.

Ambiguities

·         Amongst the lot, GST is the single biggest tax reform which all industries are witnessing today. Yet, there is a great deal of ambiguity on its impact on pharmaceutical industry, creating a lot of uncertainty in the whole supply chain.

·         To comprehend the impact of GST, let’s analyze the spectrum of pharmaceutical supply chain. On one end is the pharmaceutical product manufacturers, contract and API manufacturers and the marketing companies which market product across the country while on the other hand are Carrying and Forwarding Agents (C&F), distributors/wholesalers and retailers. There are two key things that have changed are the manufacturing price- many raw materials for API and products have moved from 5% VAT bracket to 12% GST bracket and a lot of medicine salts/compounds have moved from 5% to 12% GST bracket. Also there are a lot of food and medicine supplements which have moved from 12.5%-15% to 18 and 28% brackets, marking a record hike in price. For this, we need to understand the margins at which the supply chain operates. The C&F agent operates at 4-6% margin on MRP, distributor wholesaler operates at 7-8% margin on MRP and retailers at 20% margin on medicines. As the GST sets in, pharmaceutical companies have to pay more in manufacturing cost as raw material cost goes up by 7% and hence the MRP of the product need to be changed to absorb that impact. Thus we can expect an increase in MRP of many medicines as pharmaceutical companies decide to pass the complete burden to the end consumer.

·         The government needs to still provide clarification on the inclusion of the current benefit for the manufacturers under excise for operating from the excise free manufacturing zones.

·         Most of the drugs mentioned under the 5% tax bracket are used to cure malaria, HIV-AIDS, tuberculosis, and diabetes which were previously charged VAT around 4%. Nicotine polacrilex gum is the only pharmaceutical product to be charged at the rate of 18%. Earlier, Ayurvedic drugs or medicines were charged an average VAT of 4% and excise of 1.5% due to the excise free manufacturing zone benefit. Under GST, Ayurvedic medicines could get costlier as they would be taxed at the rate of 12%.

·         GST Rate on Pharmaceutical Products

NIL Tax	5% Tax	12% tax
Human blood and its components	Animal or human blood vaccines	All goods not specified elsewhere: Medicines made by mixing two or more constituents for therapeutic or prophylactic uses. (including Ayurvedic medicines)
All types of contraceptives	Diagnostic kit for all types of hepatitis	Medicines made by mixing two or more products for therapeutic or prophylactic uses. (including Ayurvedic medicines)
	Cyclosporin	Wadding gauge, bandages, and similar articles
	Oral Rehydration Salts	Forms or packing for retail sale regarding surgical, dental or veterinary purposes
	Desferrioxamine Injection or Deferiprone	Pharmaceutical goods specified such as sterile laminaria, dental adhesion barriers etc.
	Medicines (including veterinary medicines) used in bio-chemichal systems and not bearing any brand name
	Drugs or medicines specified in the list 3 or 4 of notification 12/2012- central excise
	Formulations manufactured from bulk drugs listed in the list 1 of notification 12/2012 -central excise

Concerns

·         There is an uncertainty if the life-saving drugs would continue to be tax-free once GST comes into force. Till now, life-saving drugs are exempted from the Excise and Customs Duties. Some of the States charge 5 percent taxes on the medicines which might change by GST rules.  

·         As the Goods and Services Tax is applicable on all the stages of the supply chain, it is still unclear how this would influence the bonus schemes, free drug samples and the inter-state movement of the expired products or the stock transfers.