GOODS AND SERVICES TAX (GST) in Indian Pharmaceutical and Its Impact on Industry
In India many companies involve in the manufacture of pharmaceutical products have set up their plants in locations where the Government has offered indirect tax exemptions/ incentive schemes (such as Baddi). These schemes provide for either upfront exemption or refund of taxes paid. Continuity of these location-based indirect tax benefits under the GST tax regime is very critical, as companies have made notable capital investments in such areas due in part to the availability of tax incentives. If the incentives are discontinued earlier, such companies are likely to face major financial challenges. This may also indirectly impact the cost of medicines and the final price to be paid by the patients. The GST Council to be formed by the Government will be allowed with determining the fate of such exemptions under the GST. The pharmaceutical industry has shown to the Government that current benefits should be exempt under the GST regime. One of the models the Government could consider if amenable to exempt such benefits is to require firms to pay GST on their finished goods, and then allow them to claim refund of benefits. Again, as such incentives have represented a significant benefit for the industry in India, it is important that developments in pharmaceutical industry be closely monitored and considered in terms of the potential financial impact, and that the industry continue to actively engage with and the governments from which they are currently receiving such incentives scheme.
Free supplies Pharmaceutical companies supply medicines free of charge as samples for doctors and as supplies to the World Health Organization (WHO) and Government as part of health awareness programs, and patient assistance programs, etc. Currently, free supplies are subject to Central excise levy (tax on manufacturing); they are typically not subject to any state VAT/CST. Under the proposed GST regime, manufacturer made free of charge and other intra-company movements, as illustrated above, would be subject to tax. This is representation of a major change and could potentially have significant negative impacts on industry’ budgets, levels of available spending in connection with such programs and the overall cost of supporting patient assist programs runs by companies.
Therefore it is very important that the pharmaceutical industry actively involve with committee and the Central and state governments in support of exempting tax from these types of transactions from GST (i.e., zero value transactions) and not requiring any turnaround of input tax credits. GST is expected to have a far-reaching impact on industry’ business operations. Pricing of products and services, supply chain, logistics and procurement, accounting, IT systems, tax compliance and other areas will be affected drastically. With respect to IT systems, enterprise resource planning systems (ERP) will likely need to be reconfigured including developing new tax masters, which can be time consuming and very expensive. Creating awareness and educating key internal and external stakeholders of companies, including suppliers and distributors, will need to represent a key component of every company’s GST change management process and implementation plan.
The next couple of months will be critical in determining whether GST which is be implemented on April 2017 is helpful or not for industry. It is currently very unclear whether the Government will be ready with the necessary administrative construct and support. It is also uncertain whether the GSTN, which is vital to implementation, when it will be functional.
It is recommended that pharmaceutical industry begin now the process of assessing the potential impacts to their business and developing and achieving four key objectives plans:
a) Involve the Government on issues and requirements that are important to running the business in an effort to influence the GST Bill. b) Avoid any disruption on business with cut-over date
c) Achieve 100% compliance with all legal and regulatory requirements under the GST
d) Identify and implement any available current tax and business/operational planning or management cost opportunities, which recognizing that implementation of such opportunities may require long lead times.
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