All sectors, including the pharmaceutical and supply chain industry, are eagerly waiting the implementation of the Goods and Services Tax (GST) bill in April 2015. Till then everyone is keeping a watchful eye on what happens next By Usha Sharma
Goods and Services Tax (GST), a much awaited uniform tax regime which was initially tabled in 2006-2007, is likely to be implemented almost a decade later from April 1, 2016,. The GST Constitutional Amendment Bill, which was introduced in the Lok Sabha in 2011, had lapsed and the NDA government thus needed to come up with a fresh bill. The proposed bill will include indirect taxes like excise duty and service tax at the central level and VAT and local levies at the state level.
However, industries seem optimistic after Prime Minister Narendra Modi’s speech at the Vibrant Gujarat Investor Summit 2015 in Ahmedabad. Modi mentioned that the centre is ready with the long awaited GST bill and very soon it will be implemented across the nation which will help industries to grow at a much faster rate. GST will be a very important part of the roll out of the MP’s ;Make in India’ vision.
Commenting on the proposed bill and its implementation, Suresh Pareek, Managing Director, Ideal Cures says, “I think the announcement of implementation of GST is true, however, its feasibility over given time frame looks a little difficult. With the appointment of Vice Chairman, Arvind Panagariya for Niti Ayog, who himself supports uniformity, the problem should find a solution.”
Logistics play an important role in the supply chain and players seem happy with the announcement. Vikas Anand, Managing Director, DHL Supply Chain India responds saying, “With the new government’s principal focus on development and economic growth, we expect the introduction of the long awaited GST, to be a reality, sooner rather than later and are confident that steps for its implementation will be undertaken speedily.”
Anil Arora, Promoter – Director, MJ Logistic Services opines, “The current government seems to have the political will and the directional leadership to implement and execute this reform.”
Presently, the tax pattern differs from state to state and like other industries, the pharma industry also needs to to follow.. SV Veerramani, President, IDMA feels that the announcement of GST implementation provided a sigh of relief to the industry and says, “With central GST expected to be a single rate for goods and services, going forward, the credit accumulation may not be an area of concern. We hope that the integration of tax on goods and services through GST would provide the additional benefit of providing credit for service tax paid by manufacturers. The multistage taxation along with the inability to take full benefit of the CENVAT credit /refund has been an issue for the industry. Furthermore, if the legislation provides for carrying forward of the unutilised credit this would be an additional boost to the industry. The biggest advantage to the industry can be that of reduction in transaction cost, with an immediate impact coming from the discontinuance of Central Sales Tax (CST).”
The pharma industry is heavily dependent on an effective supply chain. The industry needs to follow set guidelines and processes to avoid unwanted incidences. It helps companies in delivering safe drugs to needy patients at the right time. However, due to multi-level tax structure, which varies from state to state, logistic providers have faced several challenges.
Anand says, “With supply chains maturing in India, the introduction of GST will lead to an enhancement and consolidation of infrastructure and transport partners. Hence, for the economy to move forward and show positive growth, robust supply chains are imperative and the introduction of GST is now only a matter of time.”
Pareek showcases the key benefits to pharma manufacturers after GST implementation explaining, “GST will help in reducing time as different check posts at different state borders cause delay in the release of goods. Vehicles have to wait in long lines for a long time. A lot of paper work needs to be done. This problem will immediately be resolved. To a large extent, the corruption at the passing check points will be decreased.”
It is also expected that implementation of GST will be a boon for perishable goods as well. As each check post takes around four to six hours for entry and exit of the state and considering the states travelled, it is likely that around 25 per cent of total transport time may be saved and this will be important for perishable goods. Also, traffic blockages at check points will be reduced drastically.
There are various services including logistics involved in getting the input material to its final customers. With the implementation of GST, cost of any service, including logistics, may be considered as ‘value add’, and the manufacturer hopefully can get tax credit for the service tax paid.
Under GST, inter-state sales transactions between two dealers would be cost equivalent and comparable with stock transfers/ branch transfers. Inter-state transactions would become tax neutral, making India one single common market no longer divided by state borders.
The pharma sector currently enjoys various location-based tax holidays on its manufacturing activities. Under the proposed structure of GST, such area-based exemption will be done away with. However, taking into account past precedents, suitable work around/ refund process needs to be constituted to ensure that any existing hubs do not get impacted andcontinue to get the agreed benefits.
Arora emphasises on the service tax which is paid on the cost of such services and explains, “The pharma industry has the highest volume to value ratio, i.e. for a given unit of volume, it has the highest value of invoice. Hence the highest tax, so it has to follow a model where it needs to have a warehouse even in the smallest of states to save tax. Imagine the efficiency, reduced stock holding cost, reduced shelf life issues if the industry could supply an entire region or the whole country from one location.”
GST, by definition, is based upon the concept of minimal exemptions and concessions. Therefore, the current exemptions/ concessions may not continue under GST. Further, the entire margin across the distribution chain would be subject to central GST, which is not plausible as central excise duty is currently not applicable beyond the manufacturing stage. This could, thereof, impact the pricing of these products, significantly.
Pratik Jain, Partner – Tax, KPMG indicates, “Since GST is expected to have a liberal credit regime, tax paid on most goods and services should not be a cost and could have a positive bottom line impact. However, overall cash flow requirements may change owing to the principles of minimal concessions and exemptions, levy of GST on stock transfers, possible higher GST rate on imports, etc.”
The Government of India has declared 2015 as ‘Year of Active Pharmaceutical Ingredients’ under the ‘Make in India’ initiative and its relevant to note that GST will have substantial impact on APIs. As Ranjana Smetacek, Director General, OPPI points out, “From a pharma industry perspective, the GST rate on formulations would be even more relevant for Active Pharmaceutical Ingredients. The issue of accumulation of GST credit will continue, unless specific provisions are made in the GST law to address this from the very beginning.”
Implementation of GST will have a cascading impact down the line. “Simplifying the distribution network and merging smaller warehouses to regional centres will result in economies of scale being generated. Warehouse locations will no longer need to be fixed, depending upon CST constraints but will be based on demand and supply patterns, centre of gravity, long-term logistical and real estate considerations. Large shared distribution centers offer not only strategic, operational and financial benefits, but allow for better cost control, forecasting, inventory rationalisation and synergies for consolidation in transportation,” stresses Anand.
Smetacek adds, “The draft amendment bill has kept the window open to decide on the existing benefits in tax beneficial zones. The industry will follow up for a favourable disposition in these zones as there are a high number of manufacturers who avail the benefits of exemption from excise duty payment and refund of excise duty paid in cash, subject to the value addition norms as per the applicable notification.”
Relief for the pharma sector?
With the implementation of the GST, state barriers and tax efficiency planning will no longer be the key factors influencing the size and location of warehouses. The only considerations will be incoming draft of goods and the targeted coverage area of a distribution centre, and of course availability and quality of warehousing space.
Anand feels that apart from the pharma industry, other industries will be benefited from the implementation of GST. With core investments expected to increase in cold chain logistics and a clear focus on GxP and quality, drug efficacy stands to increase with the ultimate beneficiary being the end consumers.
Cascading effects on transportation will be that the state level transportation will have to transform into heightened intra-region delivery capability. Regional warehouses will primarily have large floor plates and efficiency driven, and transportation will need to be more organised, precise and time of delivery driven both these factors will bring in the required transformation of the business from fractional, unorganised vendors to organised vendors with capabilities in size and scale. All these developments and transformations will lead to smoother and more organised logistics, opines Arora.
Currently, each state has its own tax regime but after the implementation of GST, the immediate question which arises is that which companies can optimise the benefit from this uniform tax regime and how; and what are the requirements to avail of these benefits? The government has proposed that fixing the companies’ annual turnover limit at Rs 10 lakh may be a better idea.
Pareek agrees, “It is totally justifiable as the company paying the tax will also avail the Modified Value Added Tax (MODVAT) of the GST they paid on the purchase. We are basically a B2B industry, so we will have a lot of relief like doing away with collection of C-Forms, submission and assessment which causes a lot of inconvenience, as they are not received on time, causing a lot of penalties in terms of money and resources. Also, different states have different forms that are to be submitted and all this can be avoided.”
This indicates a positive side of the implementation, the application of a single tax rate across all goods and service can result in redistribution of taxes across all categories. Arora feels, “It is appropriate and fixing companies’ annual turnover limit of Rs 10 lakh is definitely justifiable. In order to prevent leakages in the tax net and bring a similar order to all trading activities, the GST net needs to be as wide as possible.”
..but will it meet deadline?
There have been high hopes about the inception of the GST regime at regular intervals. GST implementation is absolutely necessary to tackle the problems faced by various industries and will play a role in curbing corruption. Arora while replying to a question on whether the government will take different routes if the situation doesn’t permit the rollout this time as well, says that the current government seems to have the political will and the directional leadership to implement and execute this reform. “Let there be no misnomer that the transition will be smooth but, if we cannot do it now, we will miss the bus to higher GDP growth,” he cautions.
Dr Milind Antani, Legal and Tax Counseling Worldwide, Nishith Desai Associates feels, “With the current scheme of things, the discussions that are going on between the Finance Minister and the states it seems more likely than not that GST will become effective from the proposed dates.”
However, Jain feels, “Given the fact that GST implementation (including rates, etc.) may still take some time, the question before the industry is how to prepare for the new regime. The action plan may need to include several important aspects such as, communication with vendors/customers, treatment of transition stock, pricing strategies, changes in systems and processes, and so on. GST may not only change the tax system in many ways, but may change the way business is
Pareek sums up, “I think it may involve different revenue sharing formula for different states such that the state should not lose the amount that it currently receives. By this I mean that the state economy should not be affected. This must be ensured otherwise it will be difficult to implement GST.”
Given the magnitude of changes that need to be done, the preparation needs to start now. The first step towards the transition to a GST regime may be to assess the impact of GST (financial, supply chain, processes, etc.) on business. This could then help in preparing an action plan for the transition and identifying the points on which the industry needs to initiate advocacy efforts with the government. All verticals of the pharma industry are showing their eagerness in welcoming the implementation of the GST bill. Now it is time to watch whether the government gives a verdict in favour of the industry or simply disappoints … once again.