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Pharma industry welcomes GST move, expects better rates

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By Swati Rana-Mumbai

Further clarifications are needed before it comes into force

The much awaited Goods and Services Tax (GST) which will be applicable from July 1, 2017 has evoked a mixed response within the pharmaceutical industry with the release of GST schedule rates for goods. The pharma industry has welcomed the move as GST simplifies and replaces the multiple tax regime in the country, however, further clarifications are needed before it is implemented. With the release of GST rates, the pharma industry may witness around 12 per cent rise in indirect taxes on drugs and pharma exporters fear accumulation of GST credits similar to Customs Import Duty and Excise Duty.

Welcoming the move of GST Council to place pharma products at 12 per cent rate, and lower rate of 5 per cent for some life-saving drugs, Sachin Menon, National Head, Indirect Tax, KPMG in India said, “The rates announced by the GST Council for pharma products is broadly in line with the expectation of the industry.”

Analysing the impact further, Harpreet Singh, Partner Indirect Tax, KPMG in India said, “The pharma industry was hoping for nil rate for most of the lifesaving drugs; however, the centre has granted tax free status merely for essentials like contraceptives, human blood and its components etc.” He further explained that presently, pharma products generally attract six per cent Excise Duty on MRP after an abatement of 35 per cent, which takes the effective rate to around 3.9 per cent. Further, VAT is generally applied at the rate of five per cent to 5.5 per cent in most of the states. Thus, the total indirect tax incidence on drugs is around nine per cent to 9.5 per cent which is moving up to 12 per cent. Thus, applicability of GST rate of 12 per cent may result in an increase in the tax rate for the pharma sector.

Dr PV Appaji, Former Director General, Pharmaceuticals Export Promotion Council of India (Pharmexcil) and present Director General, Emeritus, explained the impact of GST on pharma exports and said, “GST may hamper pharma exports as the advance licensing scheme will be abolished and there will not be duty free licenses. Exporters have to import raw materials, bulk drugs, packaging materials with duty and after the export of finished goods, they are eligible for refund of 90 per cent within seven days and remaining 10 per cent within four to five months. 12 per cent GST on formulations and 18 per cent GST on input materials like bulk drugs with higher input GST and lower output GST on these products are likely to result in accumulated credits. The industry is seeking clarification whether there is any refund available under GST and looking for suggestions where there will be no accumulation of credits.”

The Organisation of Pharmaceutical Producers of India (OPPI) believes that the reduction in tax rates on pharma products would have helped in reducing the medicine prices and impacted patient positively. Kanchana TK, Director General, OPPI conceded that while the recent announcement of the GST rates is a move to usher one country one tax regime, the research-based pharma industry was hopeful that there would be a reduction in the tax incidence on pharma products and had expected that this would be addressed in the announcement.

Most medical devices including consumables and disposables fall into 12 per cent and five per cent slab of GST rates. The medical devices which are in vitro diagnostics and their analysers and hospital furnitures like OT tables, beds and dentist chairs etc and hospital bed sheets and sanitary items including sanitary napkins have been kept at 18 per cent GST rate.

Reacting on the GST rates for medical devices, Rajiv Nath, Forum Coordinator, Association of Indian Medical Device Industry, has raised a question on why these commonly needed medical and healthcare products have been given a raw deal, and further mentioned that for Indian manufacturers upto 12 per cent maximum rate is good to be competitive against imports in most cases. Below 5 per cent rate would again be counterproductive in terms of loss of competitiveness against imports.

Speaking about the impact on patients, Nath added that the price for most medical devices will not increase for their clients (hospitals and retailers) in the supply chain under the GST for those items at 12 per cent or below. However, he questioned the government’s claim that patients will be benefited from GST , which could happen only if the MRP on the pack comes down or retailers and hospitals sell below the MRP. The only ones to gain due to the reduced cost of procurement will be the last in the supply chain (i.e. the hospital/ retailers) but not the consumers as they will continue to buy as per the printed MRP mentioned on the package of medical devices.

“There’s a provision in GST rules against profiteering and a manufacturer is supposed to pass on the cost saving benefit to the consumer by reducing the MRP. Manufacturers were already availing Modified Value Added Tax (Modvat) on their inputs and the impact of GST at reducing manufacturing costs will be minimal but it’s expected to be much more for traders who can now reduce their procurement costs. But how does a manufacturer calculate the cost savings of a retailer and hospital? And how can he factor this and reduce MRP on this account? This is impractical. So consumers of medical devices will not gain (if) there is a reduction as retailers and hospitals will probably not pass on these benefits to them,” opined Nath.

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