Impact of GST on Pharmaceutical Sector

June 21st, 2017

Intech Systems

GST Law and ERP, Microsoft Dynamics

Indian Pharmaceutical sector is currently third largest in the world in terms of volume. As population grows, the need for healthcare services increases. This has led to more revenues from pharmaceutical sector. In current taxation structure, 8 different types of taxes are imposed on the pharmaceutical sector. Once GST gets into action, these taxes would get subsumed. GST is a unified tax systems across the nation which will bring ease in doing business and minimize the cascading effect of various taxes.

Positive impact of GST on pharmaceutical sector:

The major benefit for pharmaceutical sector is GST will rationalize their supply chain management and reduce the transaction costs due to withdrawal of CST. Inter-state transactions will become tax neutral, replacing traditional C&F distribution model. An efficient supply chain will result in reduction in logistics cost, inventory cost and thus the overall cost of the products.
The manufacturing cost and the overall cost of technology will drastically reduce too. Presently, the machinery and equipment needed for production are imported and thus, are very costly. The duty levied on these machinery and equipment is not allowed as a tax credit under the current tax system. While under GST, duty charged on such import would be allowed as a credit.
GST will also help our Medical Tourism industry in an indirect way. India currently enjoys a competitive advantage over developed countries as the cost of healthcare in India is about 30-40 percent of the similar medical treatment and procedures in those countries. With GST, the cost of healthcare package including insurance, pharmaceuticals, and international travel is expected to reduce which would culminate into better prospects of medical tourism in the country.
Currently, there exists an inverted duty structure in this sector. It adversely affects the domestic manufacturers as this means the raw materials are costlier in terms of duty than finished products. Under GST, either disposal of this structure or bringing in a refund of the accrued credit is proposed. This would prove to be a huge benefit for pharmaceutical sector.
Apart from drugs and medicines, India is also foremost in alternative medicine practices like Ayurveda, Yoga, Unani, Siddha, Homeopathy and Acupuncture which are popular among foreigners. It is anticipated that GST would also encourage this sector. This will significantly contribute towards the growth of medical tourism in the country.

Negative impact of GST on pharmaceutical sector:

GST will also have some negative effects on pharmaceutical sector. Many medicines which are taxed currently at 5% would attract 12% tax once GST comes into effect. There is still an ambiguity in the prices of life-saving drugs and healthcare services. Presently, these are exempted from the Excise and Customs Duties, but there is still a doubt about this after GST. Under GST, free samples, discount offers, etc. will also attract tax. So, in this sector too, the bonus schemes, free drug samples and the inter-state movement of the expired products or the stock transfers may attract tax.
Conclusively, the impact of GST on pharmaceutical sector is still not certain. But it can be assumed that GST will bring a win-win situation for both – customers and businesses. Reduction in complexities and decrease in overall costs are major advantages for pharmaceutical sector. Both – pharmaceutical sector and medical tourism – are on the way of expanded profitability and promising development.
In case you are still in dilemma about impact of GST on your business and how to be GST ready, feel free to reach the GST experts at Intech.