HOW THE GOODS AND SALES TAX WILL IMPACT THE PHARMACEUTICAL INDUSTRY?
India is the largest producer for generics and the country’s Pharmaceutical Industry is currently the 3rd largest in the world in terms of volume and ranks 14th in terms of value. As the population growth continues, the need for better Healthcare Services is also required. Currently, 5 percent of the country’s GDP is expended on the Healthcare sector.
The country’s healthcare industry has been growing day by day and the Health Ministry targets for the development of new technologies to end the year for treating diseases, such as tuberculosis and cancer. For attracting more FDI (Foreign Direct Investment), the Government has also raised the cap.
At last, the long-awaited GST Bill (Goods and Service Tax Bill) has cleared the hurdles of both the parliamentary houses. Certainly, it is a turning point for the country because it will not only make the taxation easy to understand but also reduce the malpractices prevalent due to ambiguity and confusion of tax norms.
The GST regime is expected to bring a great boost to the pharmaceutical industry by making the supply chain management efficient and reducing the cost of manufacturing pharmaceutical products. The reduction in the costs will get added to the profit margins which is a good thing for manufacturers.
Since the bill has gone through several rounds of discussions and it was under consideration for more than two years, it is quite obvious that it has come out as the foolproof bill. The government is determined to make it a success by taking all the necessary means. Now the constitutional hurdles are the matter of the past, now corporate world is gearing for understanding the possible impacts of GST on the business.
What all will be subsumed in GST?
Well, the fundamental objective of implementing GST is to reduce (rather eliminate) the long list of taxes and levies. It is the path towards easy and manageable tax liabilities. GST is expected to reduce following tax burdens at the central and state levels.
Central level taxes
Countervailing duty, service tax, central excise duty, additional excise duties, special additional duties of customs, and excise duties under the medicinal and toilet preparations Act 1955 will get abolished by the new taxation system. Also, surcharges on the supply of services and goods will also get abolished.
State level taxes
Sales Tax and VT at the state level, CST, Entry tax, purchase tax, luxury tax, State level entertainment tax (over and above the tax at the local level), taxes on lottery and gamble will be merged under the GST head. Also, surcharges on the supply of goods and services at the state level will also get abolished.
GST and the pharmaceutical industry:
- In the current system, specific API or life-saving drugs enjoy the benefit of non-levy of excise duty if they are covered under some specific notification of the Central Excise Law. As the Central Excise Duty will get merged in GST, these life-saving drugs will enjoy the Tax-Free status. The aforesaid goods will enjoy exemption from IGST also in case they are imported.
- It will be quite interesting to know about the translation of the accumulation of credits when GST is applicable. Since pharmaceutical companies give a high stack into it, the impact will be wholesome.
- In the existing model of Indirect Tax law, supplies made to a loan licensee enjoy exemption from VAT. It is important that the industrialists get the clarity about the situation post-GST implementation. Also, currently there is no service tax on the processing charge paid to the loan licensee because the process comes under “manufacturing process”.
- Though the proposed bill assures that the existing benefits will be continued, it is very much important that industrialists make the situation clear.
- The application of a single tax rate across all goods and service will result in redistribution of taxes across all categories. This will lead to a reduction in taxes on manufactured goods and thereby impacting the pricing of the final product.
- The integration of tax on Goods and Services through GST would provide the additional benefit of providing credit for service tax paid by manufacturers.
- Service tax is paid on the cost of such services too. With the implementation of this system of taxation, cost of any service, including the logistics, will be considered as value added, and the manufacturer will get tax credit for the service tax paid.
- The biggest advantage to this industry would be the reduction in transaction cost, with an immediate impact coming from the discontinuance of CST.
- With this central taxation system, it is expected a single rate for goods and services, going forward credit accumulation may not be an area of concern.
- Furthermore, if the legislation provides for carrying forward of the un-utilized credit this would provide an additional boost to the industry.