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Gearing up for GST

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As corporate India gets ready for D day, how is the pharmaceutical sector coping so far?

Pegged as India’s largest tax reform since Independence, the Goods and Services Tax (GST) system will finally roll out from July 1 this year. In preparation for this major milestone, the Goods and Services Tax Network (GSTN) has been created to provide IT infrastructure and services to central and state governments, taxpayers and other stakeholders to facilitate implementation of GST across the country. Another step towards smoothing the transition are GST Suvidha Providers (GSPs), which are identified private agencies who would facilitate taxpayers’ access to the GSTN. GSPs have a robust agreement with the GSTN and provide a tunnel to the taxpayer to submit their data to the GSTN.

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Suresh Nair

Explaining the role of a GSP, Suresh Nair, Partner – Indirect Tax, EY India said, “The companies have to submit transaction wise data of sales, stock transfers, and service provided which need to be submitted by July 10 (GSTR-1). Sales data uploaded by the suppliers will be available on July 11 and need to be confirmed and uploaded after doing reconciliation of mismatch, if any, such as mismatch in invoice number, invoice date, invoice value, input tax, etc by  July 15 (GSTR-2). The tax liability is to be calculated based on GSTR-1 and GSTR-2. GST is to be paid and uploaded by July 20 (GSTR-3) return (monthly return). For a taxpayer having a large volume of transaction level data required for return filing, accessing the return filing system of GSTN directly through the GST web portal could be a challenge. In such cases, the taxpayer can connect with the GSTN through third party service providers– commonly known as GSP.”

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Dr Waman Parkhi

“34 GSPs are approved and many more are likely to be approved in the days to come. GSPs have an agreement with the GSTN to provide support to the tax payer in submitting their data to the GSTN. While taxpayers can directly access the GSTN in the G2B mode, there are some limitations on the size of data that can be submitted to the GSTN.  Interacting with GSTN through GSPs would be much more flexible as they would provide enriched experience of dealing with GSTN as it could be customised to client needs. There would be Application Service Providers (ASPs) who would provide value added services which would make return filing work much easier, will provide services like dashboards and MIS for management, off line reconciliation of data, automated communication with vendors’ data analytics etc. GSPs and ASPs will play an important role in the implementation of GST in the country as they will assist automation of the taxpayers compliance process and support the IT system or ERP that the taxpayer has,” informed Dr Waman Parkhi, Partner, Indirect Tax, KPMG in India.

Initial challenges

Though the new tax regime is expected to transform the Indian economy in the medium to long term by simplifying and replacing the multiple taxes with a single tax in the country, pharma companies are still seeking many clarifications from the government.

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Jawed Zia

Pharma companies have been preparing for the change but are anticipating implementation challenges. As Jawed Zia, Country President, Novartis India puts it, “As a major indirect tax reform, smooth implementation of GST is the key to uninterrupted business operations across sectors. With digitisation of all compliances related to GST, it has become imperative for organisations to have the right systems in place. At Novartis India, we have partnered with domain leaders and made every effort to ensure that all systems have been updated, where required. Our internal team has been adequately trained to understand and comply with the new indirect taxation requirements. We are confident of our preparedness to meet the deadline of July 1 and are hopeful that all stakeholders of the pharma industry, including distributors, stockists and retailers, are equally prepared.”

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Dr Piyush Gupta

Pharma wholesalers too seem to welcome the move but express concerns on the initial stages of implementation. According to Dr Piyush Gupta, Associate Director, GNH India, “In the long term, it is a positive step as it will reduce the number of taxes and related compliance issues. But before we get there, there are some immediate challenges which are difficult to resolve. Many manufacturers have considerable stock manufactured during the excise and VAT regime and there is no clarity on how to invoice this from next month (July). Distributors too face the same difficulty regarding invoicing stock from July 1. In order to avoid too much confusion, we request the Central Board of Excise and Customs (CBEC) to open a live Q&A on the web to address these questions from businesses.”

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Amit Mookim

Taking a long term view, Amit Mookim, GM, South Asia, QuintilesIMS said, “GST is expected to significantly change the existing paradigm of business within the pharma industry. Consolidation of supply chain will happen in an environment of tax neutral interstate transactions. Focus shifting from ‘tax advantage’ logistics planning to ‘strategic location of supply’ logistics planning will lead to higher operational efficiencies. New strategic geographic hubs of pharma manufacturing will emerge as the Central Sales Tax (CST) burden loses its relevance. Overall increase in tax burden will get offset by the improved efficiencies; and pharma companies are likely to absorb the additional tax burden (an estimated net increase of about 1.8 per cent on finished formulations). While the long term outlook remains positive, managing short-term disruption will be critical.”

He supports his view by quoting from a survey conducted by QuintilesIMS with distributors and chemists across India to understand their preparedness for GST.  “Based on our survey, the on-ground readiness of distributors and chemists to implement GST by July 1 unfortunately remains below par. Pharma companies will need to leverage cross functional participation within the organisation to ensure effective implementation.”

According to Cygnet, reconciliation, distribution of data into respective section of GSTR 1 and GSTR 2 and vendor management are the major challenges faced by the pharma companies. Generally, pharma companies have lakhs of transactions a month. Companies have only five days for reconciliation between GSTR 2A and inward supply register, i.e. between 11- 15th of the month. By the 15th of each month, companies need to file GSTR 2 after taking  appropriate action.

Post July 1, the procedure to take appropriate action like accept/ reject/ modify/ hold etc. has changed. Though the return is filed by the taxation department, the purchase department needs to be consulted in order to decide what action needs to be taken.  Each purchase department could have 10-15 different personnel, and identifying which difference belongs to which individual in the purchase department and then take appropriate action is a time consuming activity. It is obvious that this process will not be completed within five days if the number of transactions is huge.

Some solutions

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Niraj Hutheesingh

But one man’s challenge is another man’s opportunity. And solution providers like Cygnet ASP have attempted to ease some of these transition hurdles. As Niraj Hutheesingh, Founder Director, Cygnet explains, “The Cygnet ASP solution provides an option (for companies) to push data on GSTN on daily/ periodic basis. They need to request their vendor to also do the same. Once data is available from both ends, even before filing of return, reconciliation can be performed and one can have enough time to resolve differences not only by discussing with the purchase department but also with their vendors in advance.”

Explaining further, he said, “Pharma companies have all type of transactions like B2B, B2C > 2.5 lakhs interstate, B2C other transactions, export, debit/credit notes, nil rated, exempted, non GST supply, advance received from customers etc. Slotting  outward supply and inward supply data into the respective sections of GSTR 1 and GSTR 2 which consists of around 14 to 17 different sections, is a time consuming activity. Also if proper care is not taken, it may result in errors and amendments or mismatches. To avoid this, Cygnet has automised everything. Cygnet has developed a utility for SAP users through which data is fetched from SAP and pushed to respective section of GSTR 1 and GSTR 2 in an automised manner. This not only saves time but also provides error-free data.”

Under the GST regime, companies need to be very selective while finalising vendors because if the vendors are not GST-compliant i.e. not migrated into GST or not filing returns on time or not paying taxes on time, the organisation will not receive the input tax credit, which will greatly impact  its working capital. Cygnet has two solution for vendor management as well.  Firstly, to ensure that one’s vendors have migrated into the GST system, Cygnet has developed a utility through which one can send a link to their vendors. Vendors need to fill up necessary fields and upload the acknowledgment  number. A report will be available to the organisation listing out vendors which have been migrated to GST.

The second option is to send an email and SMS notification to vendors mentioning mismatches and the reason for the same. Companies can send emails and SMS notifications, either a standard or customised messages, mentioning the exact reason of mismatch, to their vendors when any mismatch is identified even before the filing of returns. This feature helps because while filing GSTR 1A by vendors, if they know reason for the action, both vendor and customer can be on the same page.

According to Parkhi of KPMG In India, the readiness of IT systems is a major challenge as rules are yet to be finalised by the government and changes in IT system need finality to the structure. He said, “Multiple vendors and their GST readiness is a big question mark. Small vendors are yet to warm up to the GST readiness.”

Nair of EY India believes the transition from the current norm to the GST is one major area of concern for the industry. He said, “We are working closely with our clients to help them navigate through this phase, guide on the transitional provisions and how to address the concerns of the trade during this transition. There would be a shift from the current tax positions for the loan license, area based exemption model and consignment sale operations. We are supporting our clients to ensure that this crucial area of operations seamlessly change over to GST with maximum efficiency and ease in business for our clients.”

The new law envisages a relook at all the tax positions for unique transactions of the pharma industry. EY India is providing detailed transaction by transaction tax positions to their clients helping them address specific areas such as write off, return of expired goods / near expiry goods, refund of accumulated credit under inverted duty structure, tax positions and credit related aspects for supply of physician samples, patient assist programmes, issuance of credit note, debit note, supplementary invoice etc.

Similarly, solution/ services provided by KPMG India range from computation of financial impact on the operation of the company, computing the impact on profits and on cash-flow; impact on the IT system or ERP of the company, identifying changes in the supply chain of the company (for e.g. reduction or increase of depots, business process re-engineering to remove processes added for the tax reasons in the past, brainstorming on new businesses and processes in light of the opportunities opened up by GST), listing all transactions typically entered by the  company and documenting how these transactions would be viewed in GST and what impact they would have, re-engineer the way the transactions are done today so that these become easier from compliance perspective. KPMG India is also involved in the training of business and tax/ finance teams , training vendors, preparing SOPs for GST compliance, understanding vendor readiness for GST and helping them improve their readiness. Suggesting changes in contracts with customers and vendors is also part of their services.

Revamping ERP

Enterprise Resource Planning (ERPs) are designed to meet the requirements of the current tax system. Under the GST, new data fields would be required e.g. place of supply, GSTIN etc. These need to be introduced in the system. The masters need to be updated. Where ever the ERP service provider is not providing GST updates, the changes need to be carried out by the company themselves, ensure that the IT systems can provide data required for GST compliance and they are compatible with the ASP/ GSP selected by the company.

The ERP systems would also need to find solutions to ensure compliance of tax positions under GST which was hitherto not applicable in the current indirect tax law. To cite some examples, GST is required to be paid on advances whether received for goods or for services (presently advances for services only were subject to GST), credit notes issued for discounts and other offers to customer needs to be linked with original invoices for adjustment of GST. Also, GST is payable on reverse charge basis on all purchases from unregistered dealers, which is a new requirement under GST, said Nair.

According to Hutheesingh, the shift will broadly involve ERP updation of vendor/ customer master. For instance, currently, vendors and customers may have single registration. Under GST regime, if they opt for separate registration for each state, for each registration, the master should be updated in ERP.

The government is making continuous efforts to ensure smooth roll-out of GST. In the last meeting of the GST Council over May 18-19, 18 sectoral groups have been constituted representing various sectors of the economy. These 18 sectoral groups representing various sectors of the economy and containing senior officers of the centre and the states are being set up to ensure smooth implementation of GST by responding in time to the issues and problems of their respective sector(s).

The Directorate General of Foreign Trade (DGFT) has also constituted a GST facilitation cell in the DGFT headquarters to assist and advice exporters, trade and industry for smooth transition from present regime to GST regime from  July 1. Thus while there is a consensus that the GST is a step in the right direction, the coming quarters will be uncertain for all stakeholders in the pharma sector.

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