The Goods and Services Tax: A Bane or a Boon for Indian Pharma?

  GST-or the goods and services tax-is a next stage evolution of multi-level taxation system. It is targeted to be a comprehensive indirect tax on goods and services across their production, distribution and consumption. The system would lead to a unified value added system, implementing value added tax at all levels of supply and/or value chain. The companies under this taxation system will be able to claim credits for all paid taxes and across the supply chain. GST will facilitate companies to claim input credit for taxes paid at the time of goods purchase or service procurement.    In the current form, the proposed tax (GST) structure is expected to be common across the central and state governments of India. It is expected to replace the following: 

• Central Excise Duty 

• Service Tax 

• Additional Custom Duty 

• Surcharge and Cess 

• VAT or Sales Tax 

• Entertainment Tax 

• Entry Tax 

• Luxury Tax 

• Taxes/surcharges levied by State governments.

  In the current proposed form, the GST regime would have two components- Central GST (CGST) and State GST (SGST)-collectively known as IGST. Both the tax regimes will be levied on the taxable value of the transaction. The combined GST rate can be pegged at anything from 16% (for services) to 27% (for goods). However, please note, implementation of GST will make certain business processes tax neutral, imparting commercial effectiveness and cost optimization.    Historically, the GST system has been adopted by multiple countries-such as Australia, France, New Zealand, Japan, Singapore, and Canada. Please note, the rate of GST in these countries is different and therefore, levies variance in tax liability of any company.   

Historical performance 

In 1986, implementing GST yielded 46% more revenues than expected in New Zealand due to improved compliance. Similarly, according to estimates, the GST-pegged at 60%-in Canada resulted in an increase of 24% in GDP, driven by 12.4% increase in national income (due to increased productivity) and 50% increase in larger capital stock (due to tax cascading elimination).   

Pharma tax liability in India 

Currently, the pharmaceutical sector in India faces a multistage taxation system. Different taxes-such as import customs duty, central excise duty on manufacture, CST/VAT on sale, and service tax on provision of services-adds burden to operating margins of pharma industry. Further, the loss of tax credit on services (currently credit claims are available for raw materials) such as logistics impart insufficiencies to the complete pharma supply chain. Further, multistage taxation increases compliance cost for the pharmaceuticals as the company is liable to file multiple returns on monthly basis to different authorities.   

Post-GST era 

GST implementation will lead to re-distribution of taxes across different business functions, thereby, leading to low taxation cost for drug makers. The most direct impact is likely to come from elimination of CST. This will lead to reduction in transaction cost. In case a pharma company procures raw material from another state/s and/or the actual sale of finished products (transaction) is in a separate state than state of manufacture, then the company is liable to pay CST-which is a cost head. Further, the CST paid in purchases can’t be set-off against the VAT liability of manufacturer. Hence, this multistage taxation with inability to take complete CENVAT credit has been a persistence issue and liability.    Additionally, the GST will influence warehousing strategy of pharmaceuticals. Under GST, transaction between two dealers at an inter-state level will amount to stock transfer/branch transfer. The country would be considered one common market and therefore, making inter-state transactions tax neutral. Currently, due to CST liability, pharma manufacturers are forced to maintain warehouses in near all states and avail exemption/reduction in CST. Now, with GST, they can look to optimize and strategize warehouses.  Further, any service/process/raw material involved in supply chain of drug distribution will come under the purview of tax credit against the service tax paid. From the current provision on tax credit being available only on the raw material procured, to getting the benefit on different services-such as logistics-will ease out tax burden on the pharma sector.    With GST implemented, the Pharma sector is likely to explore different logistics and transportation alternatives. The companies may part away from the traditional C&F – distributor model to setting up zonal/central warehouses and regional distribution ports. Further, as the GST will eliminate existing liabilities on inter-state transactions, the companies may look to consolidate their networks and bring-in economies of scale across supply chain.   

Challenge 

Currently, the pharma sector enjoys tax holidays in a few regions provisioned by the government on the backdrop of regional development. The access and logistic cost to these regions is high, but is overridden by the tax benefits. However, with GST, these tax benefits will also be eliminated. It will be up to the government on how it plans to lure manufacturers to stay in these regions and ensure their development.   

Challenge

Currently, the pharma sector enjoys tax holidays in a few regions provisioned by the government on the backdrop of regional development. The access and logistic cost to these regions is high, but is overridden by the tax benefits. However, with GST, these tax benefits will also be eliminated. It will be up to the government on how it plans to lure manufacturers to stay in these regions and ensure their development.    Concluding, we assume that the foremost benefits to pharma from GST will come from unified taxation (leading to low processing cost) and optimized logistic process. However, given the pricing controls by government on drug prices, the key question to be answered is - who will avail this benefit, the patient, the government or the pharma?   

About the Author 

Dr. Anuj Gupta is a healthcare and lifesciences business consultant. He can be reached at

anujgupta.ibs@gmail.com