Pharma industry braces for the pain of GST transition

DAARA PATEL | Updated on January 12, 2018

Medicine pipeline Given the price controls that are in place, the pharma industry has a unique set of problems under the GST regime

DBP Photo- ByInvitaion

The wheels need to roll quickly on inventory management to prevent shortages in medicines

The Goods and Services Tax (GST) is a comprehensive tax on the manufacture, sale and consumption of goods and services at a national level. The new system is set to be a game changer, once it is implemented from the proposed date of July 1, 2017.

Finished medicines come under the 12 per cent slab of the recently announced GST rates. And the pharmaceutical industry is worried that transition troubles may be around the corner, if the government does not act soon enough to tackle them.

Currently, the combined excise duty and VAT on a pharmaceutical product for retail sale is about 9 per cent of MRP (with the tax on inputs for bulk drugs pegged at 12.5 per cent).

However, the Supreme Court has ruled that there cannot be a formulation with two different prices available in the market. Expecting such a scenario in the transition period to the GST regime, we had urged the Department of Pharmaceuticals in end-March 2017 to direct the National Pharmaceutical Pricing Authority to notify the revised ceiling prices as soon as the GST rates are announced.

This will enable manufacturers to schedule their production accordingly to ensure that supply of these medicines is maintained in the market without interruption. The government will need to allow re-stickering of packs with the revised MRP so as to avoid wastage of resources, as otherwise the unsold packs will have to be destroyed.

Timelines for refund

The other concern is that the tax rate on bulk drugs (raw material) has been fixed at 18 per cent under the GST regime, compared to 12 per cent on finished products. This inverted duty structure may not have too much of an impact as a credit refund mechanism has been built into GST laws. The timelines for refund, though, are not clear and may possibly follow the mechanism of refund for exports, recommended as 90 per cent in seven days and the balance 10 per cent in about six months.

One unique impact that the GST will have is on the Drugs (Price Control) Order. The pharma industry has thousands of manufacturers and over 65,000 formulations, and almost every drug has many competitors in the market. It is still the only price-controlled industry and hence has a unique set of problems.

Unless the government informs us or allows us, we are in no position to revise prices of controlled or even non-controlled products, to include the GST factor. For products controlled under the DPCO, the National Pharmaceutical Pricing Authority (NPPA) will have to notify the revised prices. Even the supposedly non-controlled products are indirectly controlled, with only a one-time revision of prices allowed in April every year.

The immediate concern though is the transition period from now to July 1. CGST Transition Rules stipulate that those who do not pay Excise Duty would only be allowed 40 per cent refund, which is almost echoed by SGST. Distributors and retailers, by the nature of their business, are not registered under excise laws as they do not manufacture any goods. They are, however, registered under VAT.

The transitional provisions will impact retailers as they sell goods at MRP determined by the supplier (manufacturer), which is inclusive of the excise duties already charged by the supplier. In the transition period, the retailer will discharge the tax liability as per the new GST Rules, but will not be able to pass this on to the consumers due to the MRP stipulation. This will lead to some gap in the credit amount availed against the tax charged by retailer, which will impose a burden on the retailer’s margin. The retailer, in turn, will seek to recover this loss from the companies, thus impacting the entire supply chain.

The solution for the interim

To avoid such losses, retailers should be allowed to avail of 100 per cent (not 40) credit of the CGST /IGST charged by the manufacturer, distributor and so on as applicable. This will reduce the burden of taxes on the retailers arising out of the transitional provisions. Otherwise, manufacturers will need to compensate the retailers for the difference, that is, 60 per cent, which is a burden as these are taxes already paid by the manufacturer.

The government machinery needs to act quickly so that industry too can manage its logistics and inventory and prevent possible medicine shortages in the transition period.

The writer is Secretary-General of the Indian Drug Manufacturers’ Association. Views expressed are personal

Published on May 26, 2017

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