The long awaited Goods and Services tax (GST) Bill has been passed by both houses of India. There will be significant improvement in Indian Pharmaceutical industry's supply chain efficiency as well as a decline in manufacturing cost of Pharmaceutical products.
Post GST, Pharmaceutical industry's traditional cost and distribution model will get replaced by supply chain efficiencies. The central tax subsumed under GST and interstate transactions between two dealers will become tax neutral. This will lead to decrease in cost which can be added to margins.
GST will also have positive effect on warehousing strategy. There are many of the pharmaceutical companies maintaining their warehouses in different states in order to avoid Central Sales Tax (CST) of different states. Post GST, manufacturers can set their warehouses at their strategic locations and consolidation of warehouses will take place across the sector.
There are various negative impacts on industry post GST. The medicines which are taxed at 5 per cent in some of the states will witness increment of another 13 per cent. In addition, it will impact free-drug samples, bonus schemes and the expired material return system followed by companies from the sector. Overall on the Pharmaceutical sector impact will be neutralised.
The Goods and Services tax (GST) is one of the India’s biggest indirect tax renovations. It is expected to be beneficial for Indian drug makers in long run as its objective is to simplify tax structure and bring operational efficiency. However, the details such as the application of the rates to Pharma is not known and we think that the government will stress on the fact that essential medicines should have minimum taxes. However, GST is welcomed as it creates a level playing field for pharmaceutical companies and will eventually benefit the consumers. Considering the health care and Pharma industry, it is expected that the new GST regulation would benefit the consumers by making affordable health care. The whole industry is waiting for the details of tax rates, exemptions and legislative framework for implementation that is to be finalized by the GST Council.
It is believed that information technology will play a crucial role in its effective execution and hence it is necessary to have durable infrastructure to ensure seamless compliance and tax administration but analysts warned that there will be very less effect on inflationary impact of GST on prices of medicines in the short run of one or two years. Also the impact on pricing of drugs will be neutral up to 12% tax rate and beyond that there will be inflationary effect to some extent. The main concern is the rate of GST must be kept at a competitive level in order to have no increase in prices of drugs and medicines.
GST may also have impact on companies to clean up their supply chain in order to save taxes. GST will be a win-win situation for both pharmaceutical companies and consumers. The simplification of supply chain and improved operating environment will alone add 2% to the size of the Pharma market and even a 2% reduction in production or distribution cost of medicines will add the profits up to 20%. It is the single biggest benefit in the arm for the pharmaceutical industry and it creates competitive advantage for those who move early. The Indian pharmaceutical industry has the domestic turnover of over $15 billion and has been witnessing high growth in the past decade but it is still facing problems like cumbersome taxation, heavy competition and increasing price controls and the new GST regulation will overcome such problems. The main drawback of the GST is that it is still not clear that whether the healthcare sector as well as life-saving drugs and medical devices will be continues to be exempted from the taxes after the implementation of the Act.
The goods and services tax (GST), India’s biggest indirect tax reform, is expected to be beneficial for Indian drug makers in the medium to long run as it aims to simplify tax structure and bring operational efficiency. However, concerns about drug prices, exemptions and compliance remain.
“The details such as what rate is applicable to pharma is not known, but we think the government will be conscious of the fact that essential medicines should have minimum taxes,” said D.G. Shah, secretary general of Indian Pharmaceutical Alliance, the industry lobby group that represents large domestic Indian drug makers.
Shah welcomed GST saying that it creates a level playing field for pharmaceutical companies and will eventually benefit consumers.
“As far as the health care and pharma industry is concerned, it is expected that the new GST legislation would benefit the consumers by making affordable health care a reality,” said Ramesh Swaminathan, chief financial officer and executive director of Lupin Ltd, India’s third largest drug maker.
Swaminathan said his company is waiting for details such as tax rates, exemptions and legislative framework for implementation that needs to be finalized by the GST Council.
“We believe that IT will play a crucial role in its effective execution, therefore it is necessary to have robust infrastructure to ensure seamless compliance and tax administration,” Swaminathan said.
Analysts warned that there could be mild inflationary impact of GST on prices of medicines in the short term of one-two years. “Up to 12% tax rate, the impact on pricing of drugs will be neutral. Beyond that, there will be some inflationary effect,” said an analyst tracking the sector who didn’t want to be named citing his company’s policy.
“The concern is that the rate of GST should be kept at a competitive level so that there is no increase in prices of drugs and medicines,” said Utkarsh Palnitkar, partner and head-pharmaceuticals and life sciences at KPMG in India
GST may also require companies to clean up their supply chain, to save taxes.
“Most likely, there will be a need to move to a hub-and-spoke model with primary and secondary hubs across states which could also necessitate an overhaul in the way companies choose their warehousing network with cities like Chandigarh, Lucknow, Guwahati and Nagpur emerging as primary hubs in addition to the metros,” said Palnitkar of KPMG.
Most analysts have pointed out that despite initial issues of tax rate and compliance, in the long run GST will be a win-win situation for both pharmaceutical companies and consumers.
“The simplification of supply chain and improved operating environment will alone add 2% to the size of the pharma market,” Sujay Shetty, leader of the pharma and life sciences at PWC India.
Even a 2% reduction in production or distribution cost will add to the profits by over 20%. It could be the single biggest shot in the arm for the pharmaceutical industry and create competitive advantage for those who move early,” said Manish Panchal, practice head-chemicals, lifescience and supply chain, and Siddharth Paradkar, principal-logistics and supply chain, at Tata Strategic Management Group in their latest report.
The Indian pharmaceutical industry, with a domestic turnover of over $15 billion, has been witnessing high growth over the past decade. But it is facing problems like cumbersome taxation, heavy competition and increasing price controls.