GST and considerations for the pharmaceutical industry

Suresh NairGST is expected to be a game changing reform for the Indian economy, since it will develop a common Indian market and reduce the cascading effect of tax on the cost of goods and services. If implemented, GST will result in a complete overhaul of the Indian indirect tax system with wide ranging implications including tax structure, tax incidence, tax computation, tax payment, compliances, credit utilization and reporting.Key implications: Rate of taxThe rate of GST applicable on pharmaceutical formulations is yet to be finalised, but it is expected that the said goods could be covered the under lower tax bracket of around 12% GST. It should also be ensured that life-saving drugs enjoying exemption from taxes in the current regime continue to have the same tax treatment under GST. This would ensure that the impact of the new tax regime on the cost of healthcare to the patients remains at a status quo. However, if medicines are subject to higher GST rate, regulatory restrictions in India with respect to increasing the maximum retail price for notified drugs may pose a challenge to pharma companies.Inverted duty structure: The Model 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. Loan Licensee Model:The Model 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. Tax-free havens:Continuity of the area-based indirect tax benefits under the GST regime is critical as companies have made significant capital investments in such areas (Baddi, North Eastern states, Jammu & Kashmir). It is expected that in the proposed GST regime, these units may be required to pay GST on their finished goods to ensure GST at every stage of the supply chain. At the same time, the industry is hopeful that they would be entitled to claim refund to the extent of the benefits currently available to them in these tax exempt zones. Free supplies There exists 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 are typically 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. The pharmaceutical industry should represent with the Government to ensure that GST is not payable on these types of transactions (zero value transactions) with no reversals of input tax credit.GST: The road ahead Needless to say, GST will have a far-reaching impact on almost all aspects of business operations in the country, including pricing of products and services, supply chain, IT, and accounting and tax compliance systems.Creating awareness with key stakeholders such as suppliers, distributors and internal stakeholders will be the need of the hour so that they are kept informed of the plan and progress on the implementation of this company-wide initiative. It is advisable for the Industry to plan its transition to the GST regime in advance to enable that the three key objectives – no business disruption as on the cut over date, 100% compliance of all legal and procedural requirements under the new law, and managing opportunities effectively to generate business value by plugging leakages in the current indirect tax law The views expressed in this article are personal to the authorAuthor is tax partner with EY