GST’s one year journey and impact on Pharma

The one year’s journey has completed with full of ups and downs – registration and revenues went up and increase in burden of compliance for taxpayers with ease of movement of goods and doing the business by eliminating naka barriers.

The multiple amendments in regulations, teething problems of the GST Portal, inherent issues in GST has given sleepless nights to all the stakeholders. However it is rightly said ‘What comes easy won’t last long and what last long won’t come Easy’. It is very much true for GST which has been implemented in India which has a Federal System of Governance and complex geographical and consumption dynamics.

Some of the ups and downs in terms of compliance

The biggest achievement of the GST is that it has subsumed all major indirect taxes in the country like excise, VAT, Service Tax etc. This has resulted into GST becoming unified indirect tax law in India. With GST in place, goods and services are uniformly classified across the country where India has become a common market. GST Law has been drafted in such a way that it is difficult to run an entity without getting GST registration. India’s monthly goods and service tax collection crossing INR 1 lakh crores indicates that indirect tax regime is stabilising and economic revival is also picking up the pace.

The implementation of GST has paved the way for claiming input tax credit of Goods and services without any discrimination. Although there is higher rate for some of the items however that has not resulted into hike in prices of goods and services thereby not resulting into inflationary pressure on the economy.

Multiple tax rate, dual GST, negative list of ITC etc. has not been seen on a good note with taxpayers. Hence it is anticipated that the government will soon include petroleum product and stamp duty in GST net to remove the cascading impact to some more extent. The government tried to implement GST in TOTO from first day itself however provisions like Reverse charge mechanism, Time of supply being new concepts took more time to implement and understand its implication. The filing of transitional forms, registration modules and head wise payment system made GST compliance very cumbersome. The refund mechanism for exporters, including data matching law, besides procedure governing them have already irked the sector.

Simplification and standardisation of compliance and single return instead of two or three return to ease taxpayers’ burden should continue to be of prime importance for the government especially with repeated deferment of compliance dates due to technological problem. The government should now focus on reducing the slab rate from four to three since the collection is already above the mark and therefore moderation in rates is highly warranted thereby encouraging pharma sectors which will leads to boosting the economy. The cabinet is already cleared an ordinance to decrease the GST rate from 12 per cent to 5 per cent for the pharma sector which is a welcome step taken by the current government which is much appreciated.

On the whole, GST is will create a level playing field for generic drug makers, boost medical tourism and simplify the tax structure. If there is any concern whatsoever, then it relates to the pricing structure. The pharma sector is hoping for a tax respite as it will make affordable healthcare easier to access by all.

Certain issues which require government attention’s in respect of pharma sector

Under GST Law, the term ‘supply’ includes transfer. Accordingly the transaction between a principal and an agent and from one location to another location in two different states would also attract tax liability. Further, the determination of taxable value is also important to determine the tax liability on same. The council need to take up this issue with respective authority. The rate of tax on the inputs in pharmaceutical industry is higher than the rate of tax applicable on outward supply, thereby resulting to inverted duty structure. Refund on account of same is available under rule 89(5). However, it would have been better if, in the first instance itself, the GST regime does not provide for an inverted tax structure.

Under earlier regime free samples given by manufacturer to distributor where subject to tax under excise law. A free samples given by distributor to retailers where not taxable under VAT Law. Whereas under GST regime free samples is taxable supply and tax shall be levied on the transaction value which in case of free supply is zero. Accordingly no tax is levied in case of free samples. However, as per section 17(5) (h) Input tax Credit w.r.t. to free samples are specifically disallowed and need to be reversed. It is tedious to identify the portion of credit which goes into finished goods which are cleared as free sample or promotional material hence council should provide some per cent to reverse the credit on chargeable value which can be considered for reversal of credit.

Pharma companies incurs huge cost on R&D and accordingly the output may not be certain, under such circumstances is credit eligible in respect of those entity which availed the ITC in their books of account. The question here is that whether it is allowed? (Do you expect some to answer this?)
In the healthcare, anything consumed a medicines or medical food or supplements for health should all fall under the preview of one GST tariff. Now nutritional essential supplements thus should also be made to fall under the same GST rates which will go a long way in the compliance of essential nutrition for essential health for the entire population of our nation.

Overall, problems like compliance, tremendous increase in paper works, improper functioning of GST portal,etc needs to be helped with. The agenda of the Govt.should be to make the law simpler which can be a deciding factor for success of this reform. The dream of One Nation-One Tax-One Market will then become a reality soon.