The Indian pharma industry is still analysing the opportunities and challenges that Goods and Services Tax (GST) regime has brought since its introduction in the country almost a year ago. The sector is facing challenges like increase in effective rate of new tax mechanism provided for refund of inverted tax structure, place of supply issues in relation to Research and Development and other similar changes. Since the GST implementation from July 1, 2017, various sectors are coming to terms with the impact of the new tax regime, said L Badri Narayanan, Partner, Lakshmikumaran & Sridharan.
The challenges are due to increase in effective rate of tax and anti-profiteering. Medicines attract a concessional GST rate of 12% which is higher than the effective rate of taxes: VAT and excise duty applicable prior to July 1. This increase adversely impacts the medicine pricing that percolates to the end consumers. The National Pharmaceutical Pricing Authority (NPPA) needs to relook at the drug pricing, so that the interest of both the consumers and the pharma companies can be protected, he added.
GST has enabled the pharma manufacturers to claim input tax credit of various taxes like CST on interstate purchases, octroi and other entry taxes. These were not available as input tax credit under earlier regime and is an additional benefit that the sector is bound to gain. But the increase in GST rate has negated the impact of these benefits. Companies are facing challenges to comply with anti-profiteering provisions which seek to impose conditions to pass on the benefits but is silent on factors that increase the price, Narayanan told Pharmabiz.
Inverted tax structure was prevalent in pharma, wherein a higher excise duty rate on raw material like active pharmaceutical ingredients and lower excise duty rate on finished products led to substantial accumulation of credit in the hands of manufacturers impacting the working capital needs, he added.
The GST Act provides for refund of accumulated input tax credit on account of inverted tax structure, thereby giving an impression of working capital relief to the manufacturers. However, this relief is illusionary, since the methodology provided to calculate this relief is restrictive in nature. Further, subsequent amendments have further narrowed down the relief, restricting the refund to the extent of raw material/inputs only. It omits accumulation due to GST on services and capital expenditures which is unlikely to create a positive impact as envisaged earlier, especially for companies catering to the domestic market.
Delving on the R&D activity for drug discovery which is shifting to a collaborative approach, Narayanan said that it involves multiple stages and processes. The specific place of supply provisions under GST creates challenges in case various stages of the R&D process are carried out in different countries. GST provides for specific place of supply provisions to tax performance based services to the extent that these are performed in India. This results in GST becoming a cost to the extent R&D activities are performed in India for foreign collaborations.
The government needs to address this along with handling of expired goods, refund based exemption, and procedural simplicities to file returns which will definitely be a step to achieve ease of doing business in India. It will also benefit the consumers by way of reduced healthcare costs, he said.