GST: The right prescription

Kanchana TK | Updated on January 17, 2018


Kanchana TK

Passing of the Constitution Amendment Bill for GST is welcome, but some features specific to pharma industry need clarity

The passage of the Constitution Amendment Bill to enable a Goods and Services Tax (GST) regime sets the economy on the path of significantly reduced layers and complexity in the indirect tax system; this will improve the growth prospects and productivity of the economy.

Globally, India’s pharmaceutical industry is the third largest by volume and 14th largest by value. To realise its full potential and protect the crucial investments made, the GST — perhaps the most crucial part of what economists call the fiscal policy framework — must get pro-active, and provide an environment of certainty and predictability. To achieve that implementation holds the key.

The panel headed by Chief Economic Advisor Arvind Subramanian envisaged a three-tier rate structure: a lower rate for essential goods at 12 per cent, a 40 per cent rate on luxury cars and other demerit goods such as pan masala and tobacco products, and 17-18 per cent on all other goods.

Life-saving drugs are exempt from excise and customs duties. It is critical that this be continued in the new regime; any increase will impact patients, particularly people in the economically weaker sections who will have to bear an additional burden they can ill-afford to. Everyone will be watching to see how the GST Council aligns the rate structure, including for products which will be exempt from the GST levy.

GST is applicable on all supplies, including stock transfers even when there is no actual sale. The Government should clarify whether it will subject free supplies such as samples to patient assistance programmes, doctors, and so on to GST, including on inter-state movement of expired goods.

The Government has taken a bold step in scrapping the controversial 1 per cent levy on inter-State movement of goods. We believe that that the said levy should be repealed in its entirety. To make things simpler, valuation rules for inter-state stock transfers that are subject to central excise should be made easy to follow.

One of the industry's biggest challenges is its inverted duty structure: inputs are taxed at 12.5 per cent currently, while finished formulations are taxed at 6 per cent from a central excise duty stand point. The difference is accumulated as a value-added tax credit (or CENVAT), but no provision exist for refunds against accumulated CENVAT credits. The process of getting refunds under State VAT rules (where they exist) is also a long one. Specifically notifying the pharmaceutical industry under the model GST law and making the process of getting a refund easier, by automating it, would make a huge difference to drug manufacturers. A big first step is the provision in the model GST law which allows refunds in case where the GST rate on inputs is higher than the GST rate on outputs.

The Government has provided a number of incentives to the industry, including outright exemptions of excise duties, for example, for locating manufacturing operations in North-East States, Jammu & Kashmir, etc. Continuing these incentives under the GST regime is imperative; companies have made huge capital investments in these areas, and taking away those exemptions would lead to deleterious impact on local economies and on patients therein.

As we move into the new regime, there will be process-related transitional arrangements. Multiple stakeholders — including industry associations — should be involved in making the process as smooth and painless as possible. Industry, governments — both States and central — and the tax authorities must work together to move the Indian economy to a higher orbit.

The writer is Director-General, Organisation of Pharmaceutical Producers of India (OPPI). The views expressed are personal

Published on August 05, 2016

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