Currently, Indian drugs are exported to more than 200 countries in the world. India is the largest provider of Generic drug medicines globally and is expected to expand further experiencing a boom in the medical industry which will help in generating additional returns for the Industry.
The pharma sector occupies a special and peculiar case owing to the medicinal requirements it offers. The pharma industry contributes around 1.72% percent of the GDP. Hence the introduction of GST on medicines ought to have a widespread bearing on the pharma industry as well as on the well-being of the patients.
Currently, the applicable rates of GST on medicines are divided into four brackets: 0%, 5%, 12%, and 18%.
Positive Implications of GST on the Pharma Industry
Eliminates Cascading Effect on Medicines:
GST on medicines eliminates the cascading effect of tax which involved multiple taxes which are applied to a single product. The GST framework would create a common pharma market with equal opportunities for growth across several states.
Efficiency in Supply Chain:
Due to the uniform tax structure provided by the GST framework, the traditional cost and distribution Model would be replaced by supply chain efficiencies and tax would become neutral. Pharmaceutical companies would find freedom in exploring various strategic supply chain and distribution channel and bring overall logistics cost down.
Refund in case of Inverted Tax structure:
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 has a law in place for an inverted duty structure and brings in a refund of the accrued credit. It proves to be the biggest advantage for the healthcare sector and would act as a booster for the growth of the healthcare industry.
Lower Tax Rate for Life-saving Drugs:
Under the GST framework, life-saving essential drugs such as Oral rehydration salts, diagnostic kits for hepatitis, and other life-saving injections fall under the tax bracket of 5 percent.
Increase in Compliance:
Now under GST, various distribution channels will be required to obtain registration and file returns. Earlier they were not required to obtain registration since they were not involved in the payment of taxes and filing of returns. This will increase compliance and would curb practices of non-issuance of invoices.
Negative Implications of GST on the Pharma Industry:
Increase in Manufacturing cost:
Goods and Service Tax is having a constructive impact on the Indian Pharmaceutical Industries as it has increased the manufacturing cost. Most drugs mentioned in the 5% tax bracket under GST were previously covered in the 4% tax bracket under VAT.
Destruction of Expired Medicine:
The manufacturer is required to reverse the ITC availed on the return supply as per the provisions of Section 17(5) of the CGST Act, 2017 if the time-expired goods which have been returned by the retailer/wholesaler are destroyed by him. The ITC which is required to be reversed in such a scenario is the ITC availed on the return supply and not the ITC that is attributable to the manufacture of such time-expired goods.
Under GST, Ayurvedic medicines could get costlier as they would be taxed at the rate of 12% which was earlier covered by the 4% tax bracket under the VAT regime. Because of this hike in the tax rates, MRP must be revised to absorb the overall effect.
Taxability of Free Supplies:
Supply of goods between persons without consideration is deemed to be a ‘supply’. Accordingly, stock transfer of promotion materials/ free samples will be subject to GST. Subsequent supply of the said promotion materials to stockists/end customers will also attract GST.
Under the GST regime, the seamless availability of input tax credits even on inter-state transactions makes it possible for many companies to employ a hub and spoke mode. The thrust that GST gives to the supply chain coincides with the move that pharmaceutical companies are making to continuous manufacturing and industrial automation. Thus, the supply chain aspects should be looked at as a serious cost optimization exercise that would further enhance the competitiveness of the businesses.