Where Clarity Is A Prime Concern
Just like other sectors, India’s pharmaceutical industry, too, is readying itself to cope with the country’s biggest tax reform, as the government seems stuck to the 1 July deadline for the Goods and Service Tax (GST) roll out.
The pharma sector in India accounts for about 2.4 per cent of the global pharma industry in value terms and 10 per cent in volume terms and is expected to expand at a CAGR of 15.92 per cent to $55 billion by 2020 from $20 billion in 2015, says a report by India Brand Equity Foundation (IBEF).
A regime as complex as the GST is bound to impact a sector as large as pharma. For instance, since the new regime is set to see an additional 3 per cent tax on most drugs and pharma products with 12 per cent GST, the industry’s biggest dilemma is that whether it should pass on the additional tax to the patient, which will result in a price hike. The industry has however sought clarity on this from the National Pharmaceutical Pricing Authority (NPPA).
The government has so far announced GST at 5 per cent on animal or human blood vaccines, diagnostic kits for hepatitis, malaria and thalassaemia drugs, oral dehydration salts and few other drugs notified in the central excise provision. While the GST is 12 per cent on all other drugs, there is no clarity on some of the life-saving drugs on which there are no duties and other taxes at present.
Currently, the average VAT rate for most of the pharma ingredients in the country is around 5 per cent. And it is 9 per cent for the formulations. “Our industry body has requested the government for clarity on this 3 per cent additional tax, whether the industry is allowed to revise the price accordingly or it should absorb the same,” says Arvind Agrawal, CFO, Ajanta Pharma. Other than this, the industry is all set to enter the new tax regime, adds Agrawal.
The new tax regime also needs clarification on excise duty exemption given to manufacturing units located in tax-free zones. Majority of the top and medium companies that have manufacturing in such zones hope that the GST paid will get adjusted through refunds on account of the current exemption.
The excise duty currently levied on pharmaceuticals is 12.5 per cent.
“Organised assesses are on the path to implement GST successfully with the help of technology. However, unorganised players are in the midst of decoding GST and struggling to be GST ready. One of the reasons of not being ready is the wrong notion of GST getting delayed,” says Nitin Parekh, CFO and executive director, Cadila Healthcare.
In most States, the VAT on the pharmaceutical products is charged on the maximum retail price (MRP) and is charged at a single point. Therefore, the distribution channel does not pay any tax or file tax returns. Payment of timely taxes and filing 37 returns is going to be a daunting task for the distribution channel.
Parekh, says, “Under GST regime, all companies would have to move to a more disciplined environment and do the compliance with the help of technology. Hence, it is relevant to map all the business transactions and processes in the system as per the GST regime.”
Parek also adds that there are certain areas that are still open and clarity is still awaited from the government on treatment of area based exemption under GST regime, export procedures, etc. “Pharmaceutical industry is anticipating that the government issues appropriate clarifications at the earliest with respect to the open issues so as to be fully prepared,” adds Parekh.
