Impact of GST on Pharmaceutical Industry
Drugs and pharmaceutical industry plays a vital role in the economic development of a nation. It is one of the largest and most advanced sectors in the world, acting as a source for various drugs, medicines and their intermediates, as well as other pharmaceutical formulations. The Indian drugs and pharmaceutical industry, over the years, has shown tremendous progress in terms of infrastructure development, technology base creation as well as product usage. On the global platform, India holds fourth position in terms of volume and thirteenth position in terms of value of production in pharmaceuticals. The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion the growth rate of the industry is 13% per year.
Indian drugs are exported to more than 200 countries in the world. India is the largest provider of Generic drugs medicines globally and expected to expand further experiencing a boom in medical industry which will help in generating additional returns for the Industry.
Opportunities and challenges for Pharmaceutical industries: -
Opportunities to create supply chain efficiencies: Most of the pharma companies operate 30-35 warehousing locations in India; on the keys reasons for this arrangement is the current indirect tax structure of India. Under the current indirect tax structure interstate sale of good (i.e. sale of goods from one state to another state) central sale tax attracts, which is not credible to the buyer, whereas interstate movement of goods across warehouse of the same company is not subject to tax. Hence pharma company have adopted a decentralized supply chain model whereby multiple warehousing location in different state in India have been operated to avoid tax leakage from the direct inter-state sale of goods. Since GST on interstate sale of goods was to be credible under the GST law there exists an opportunity for companies to revisit current supply chain structure.
Free Supplies: Thereexists various scenarios where medicines are supplied free of cost. For example, samples sent to physicians, supplies to WHO/Government as part of health awareness programs, patient assist programs, etc. Currently, free supplies are subject to Central Excise levy and not subject to state VAT/CST. Under the proposed GST regime, supplies made free of cost and other internal transactions, as detailed above, would be subject to tax. This would result in higher costs to the company.
Tax-free havens: Many companies engaged in the manufacture of pharmaceutical products have set up their plants in locations where the Government has offered indirect tax exemptions/ incentive schemes. These schemes provide for either upfront exemption or refund of indirect taxes paid. Continuity of these location-based indirect tax benefits under the GST regime is critical, as companies have made significant capital investments in such areas due in part to the availability of these tax incentives. If the incentives are discontinued prematurely, such companies are likely to face financial challenges. This may also indirectly impact the cost of medicines.
Loan Licensee Model: The GST law also provides special provisions for movement of goods for job work without payment of GST. While this could be beneficial for the Pharmaceutical Industry, it will require approval. Of the Jurisdictional Commissioner by way of special order. In case the permission is not granted, the law states that supply of raw or packing materials for job work cannot be undertaken without payment of GST. A job work procedure based on self-declaration which doesn’t require specific approval from the authorities would be welcomed by the industry.
Inverted duty structure: The GST law provides for refund of accumulated credit resulting out of increased rate for inputs vis-à-vis reduced rate of output supply, a welcome change for the pharma industry, which has been struggling with a high amount of blocked credit.