India, as the largest generic medicine producer, is likely to reap benefits from GST implementation for both pharmaceutical industry as well as for the consumers
With the Goods and Services Tax (GST) all set to be implemented in less than two weeks now, the country, industries and the people are getting ready to embrace this herculean reform in indirect taxation. The introduction of GST is likely to affect the way businesses work as far as industry is concerned. It is also likely to benefit the consumers by overall decrease in prices. The healthcare sector is no exception to this.
India is the largest producer for generic medicines and by 2020 India is likely to be among the top three pharmaceutical markets by incremental growth and sixth largest market globally in absolute size. As the population continues to grow, the need for better healthcare services is also growing. Currently, five per cent of the country’s Gross Domestic Product is expended on the healthcare sector. The total industry size is expected to touch $160 billion by 2017 and $280 billion by 2020.
The country’s healthcare industry has been growing exponentially in the last few years. The Ministry of Health and Family Welfare targets for the development of new technologies for treating diseases by the end of the year — such as tuberculosis and cancer. Also, India has made its place in the world of medical tourism. According to a study, India is placed among the top three medical tourism destinations in Asia; mainly due to the low cost of treatment, quality healthcare infrastructure and availability of highly-skilled doctors, as per medical value travel by KPMG and Federation of Indian Chambers of Commerce and Industry (Ficci).
GST is the most important indirect tax reform measure taken by the Government since independence. It is going to be a game-changer for many industries, including Indian pharmaceutical industry and healthcare in general. Nearly 17 federal and State taxes will be replaced with one uniform tax, thereby eliminating the troubles arising out of cascading of taxes, multiple taxes and different rates of tax on the same commodity in different parts of the country. For example, the rate of Value Added Tax (VAT) on medicines is 5.5 per cent in Maharashtra and five per cent in Tamil Nadu whereas it is 6.25 per cent in Punjab levied at the first stage i.e. on the importer. In Kerala, the tax is on Maximum Retail Price. With GST our nation will be unified economically, as there will be uniform rate of tax, making the whole nation a single market. There are four slabs of tax rates under GST i.e five per cent, 12 per cent, 18 per cent and 28 per cent.
Healthcare has been exempted from GST altogether, which means, for example, no GST can be charged on healthcare services by a clinical establishment. An authorised medical practitioner or para-medic and on services provided by way of transportation of a patient in an ambulance etc. There are primarily two slabs on the pharmaceuticals — 5 per cent for the life saving drugs, 12 per cent for the rest of the drugs. As far as the healthcare and pharmaceutical industry is concerned, the new GST legislation would benefit the consumers by making affordable healthcare a reality. The multitude of taxes which were incurred on pharmaceuticals, like excise duty at the time of manufacturing, Central Sales Tax (CST), additional duties of custom on imports, service tax on propagated services and other levies of the States were creating a lurching effect on the pharmaceutical industry. Below is a broad example of how GST will affect the pharmaceutical industry and the consumers.
Whenever a dealer purchase any goods from another dealer who was a tax payer, the purchaser got credit for that tax paid. He could further utilise this credit for discharging his tax liabilities or as in VAT regime of some States, he could seek refund of excess credit. In pre-GST regime credit was available only under the law under which tax had been paid. This is to say that the Cenvat Credit scheme from paying excise duty could not be utilised to discharge VAT liability and vice versa. Furthermore, no credit was available on CST paid on inter-State movement of goods. This led to cascading of taxes which were added to the cost of the dealer. So, when the cost of the commodity increased for dealer it was passed on to the consumer as increase in prices.
Under GST all the taxes enumerated above are being subsumed under one tax and full availability of credit on tax paid at any stage whether on manufacturing or on inter-State movement or within a State will make the Indian pharmaceutical industry competitive in international market by reducing their input costs. This will benefit when passed on to the consumer which will result in reduced prices and benefit the consumers. GST is expected to be a win-win situation for drug makers as it will not only simplify tax structure but also create a level-playing field for pharmaceutical companies. Currently, there are some area based exemptions for example, Tax Holiday Scheme in certain States like Himachal Pradesh and Uttarakhand which implied exemption from excise duty. This was giving pharmaceutical industry, set up in these States, an advantage over the industry in States without any such exemptions. These exemption schemes will most likely be converted to reimbursement schemes to create a level playing field.
Further, post-GST any exemptions that will be given will be on a pan-India basis. Any rate of tax that is to be charged will apply throughout the country. The law, the rules and regulations governing business will be the same throughout India. All this will create a level playing field for pharmaceutical companies irrespective of their geographical location within the country.
There is a clause for anti profiteering clause in-built in GST which broadly implies that if there is a decrease in the rate of tax of a commodity it has to be mandatorily passed on to the consumer in the form of reduced prices. This will ensure that any benefit from reduced costs to the dealer results in reduced prices to the consumer. As far as pharmaceutical dealers’ or chemists’ interests are concerned, their fears of double taxation have been laid to rest in the final GST Act. The chemists or retailers of pharmaceuticals were worried that they would not be able to avail credit on the tax paid by them, even though, indirectly, the stocks are held by them. This, they feared would lead to double taxation.
Their concerns have been addressed under GST as the credit of tax paid on the stock held by pharmaceutical dealers who received invoices with duty or VAT paid in-built in them will be available to them as credit at the rate of 40 per cent of the tax as and when that stock is sold within a period of six months from the appointed day July 1. The likely impact of GST on pharmaceutical sector, in terms of impact on tax rate, inventory management, logistics and overall impact will be positive.
All in all, GST is going to be one sweet pill for the pharmaceutical sector and the exemption of healthcare from GST will be a mammoth step in the direction for providing accessible healthcare to all. Its get, set, go for GST now.
(The writer is a practising doctor)