Pharma industry recovers from GST pangs, poised for double digit growth

Viswanath Pilla
Moneycontrol News
The Indian pharmaceutical market returned to double digit growth of 10.8 percent in May for the first time in over a year indicating the pangs of transitioning to the Goods and Service Tax (GST) regime have been left behind.

The new tax system that came into effect from July 1, 2017, subsumed cascading taxes such as central excise, service tax, octroi, value added tax, sales tax and entry tax, and promised ease of doing business in the long run to the pharmaceutical industry.

The GST made provisions for drug makers to get refunds in cases of inverted duty structure. The rate applicable to finished dosages is generally 12 percent, whereas active pharmaceutical ingredient (APIs) are taxed at 18 percent, putting domestic manufacturers at a disadvantage over importers.

Disruption

However, transition to GST hasn't been a smooth ride for the industry, as pharma supply chain had gone through unprecedented disruptions.

Pharma distributors and retailers had resorted to de-stocking inventory on concerns over potential losses arising from mismatch between tax payout and tax refund in the transitioning phase.

According to research firm AIOCD Pharmasofttech AWACS, inventory levels of drugs at stockists dropped from 40 days at the end of May to 17 days as of June 28.

In the second quarter of FY17 ended September - the Indian phrama market grew just one percent compared to 14 percent in the same period of the previous year. The second quarter is generally considered to be good in India.

Drug makers have to take a cut on margins to compensate for the losses incurred by stockists.

An executive of an Indian drug maker on who largely relies on the domestic formulation business on condition of anonymity said his firm had to take 2.34 percent impact on the profit margin due to mismatch of pre and post rates.

The industry in FY18 on an average grew at 6.3 percent, while it reported 10 percent industry average growth rate was in FY17, according to AIOCD.

Recovery

The inventory levels have bounced back and stabilised at an average 35 days.

Analysts estimate that a 10 percent growth rate shouldn't be a problem and companies have started seeing the advantages of the simpler GST system.

"Although there were teething issues in implementing GST initially during the transition period, things have more or less settled now," said VS Mani, Executive Director and Chief Financial Officer of Glenmark Pharmaceuticals.

"We have a robust supply chain that is GST compliant and there aren’t any major GST-related headwinds for the domestic business now. For initial few months, we did not receive refunds from the government but the system is now in place," Mani said.

Pharma companies have aligned their distribution model and are witnessing cost benefits.

Pending issues

Analysts expect 12 percent and 18 percent rates to merge somewhere at 16 percent in the days ahead.

"Classification disputes between 12 and 18 percent will be resolved, and this will be revenue neutral," said Abhishek A Rastogi, Partner at Khaitan & Co.

Rastogi has pointed out other unresolved issues under GST - such as the arbitrariness in terms of valuing quantity discount versus trade discount, transition credits of stock that are older than a year. The GST regime is denying tax credit to stockists holding on to supplies of more than a year, despite having invoices.

The industry is also looking at more clarity on procurement from unregistered dealers.