At last, the long-awaited GST Bill (Goods and Service Tax Bill) has cleared the hurdles of both the parliamentary houses. Certainly, it is a turning point for the country because it will not only make the taxation easy to understand but also reduce the malpractices prevalent due to ambiguity and confusion of tax norms.
The GST regime is expected to bring a great boost to the pharmaceutical industry by making the supply chain management efficient and reducing the cost of manufacturing pharmaceutical products. The reduction in the costs will get added to the profit margins which is a good thing for manufacturers.
Since the bill has gone through several rounds of discussions and it was under consideration for more than two years, it is quite obvious that it has come out as the foolproof bill. The government is determined to make it a success by taking all the necessary means. Now the constitutional hurdles are the matter of the past, now corporate world is gearing for understanding the possible impacts of GST on the business.
What all will be subsumed in GST?
Well, the fundamental objective of implementing GST is to reduce (rather eliminate) the long list of taxes and levies. It is the path towards easy and manageable tax liabilities. GST is expected to reduce following tax burdens at the central and state levels.
Central level taxes
Countervailing duty, service tax, central excise duty, additional excise duties, special additional duties of customs, and excise duties under the medicinal and toilet preparations Act 1955 will get abolished by the new taxation system. Also, surcharges on the supply of services and goods will also get abolished.
State level taxes
Sales Tax and VT at the state level, CST, Entry tax, purchase tax, luxury tax, State level entertainment tax (over and above the tax at the local level), taxes on lottery and gamble will be merged under the GST head. Also, surcharges on the supply of goods and services at the state level will also get abolished.
Impact on the pharmaceutical industry in specific
- In the current system, specific API or life-saving drugs enjoy the benefit of non-levy of excise duty if they are covered under some specific notification of the Central Excise Law. As the Central Excise Duty will get merged in GST, these life-saving drugs will enjoy the Tax-Free status. The aforesaid goods will enjoy exemption from IGST also in case they are imported.
- It will be quite interesting to know about the translation of the accumulation of credits when GST is applicable. Since pharmaceutical companies give a high stack into it, the impact will be wholesome.
- In the existing model of Indirect Tax law, supplies made to a loan licensee enjoy exemption from VAT. It is important that the industrialists get the clarity about the situation post-GST implementation. Also, currently there is no service tax on the processing charge paid to the loan licensee because the process comes under “manufacturing process”.
- Though the proposed bill assures that the existing benefits will be continued, it is very much important that industrialists make the situation clear.
Finance experts are overwhelmed about GST
Tax experts are unanimous about the fact that there will be a negative impact on the prices as the taxation will increase to 12 percent as against five percent (the existing rate). Also, there will be a need of changing MOUs (Memorandum of Understanding) across the country since area-wise exemptions (the current practice) will be heavily impacted by the GST regime. Thus, consumers may feel agitated initially because they will have to pay more money.
In addition to it, the bill will impact the bonus schemes, the return of expired drugs and the free sample of drugs. Thus, the pharmaceutical companies will have to redesign the incentive schemes from the scratch.
However, there are several positive things as well. Since the central tax will be included in the GST, there is a relief to the business community. Moreover, transactions between two dealers of different states (interstate transactions) will be tax neutral. Therefore, the traditional CF Distribution model will be revamped altogether. It will be replaced with efficient supply chain models. Since many pharma companies today operate on a trader of goods model, they can’t set-off service tax paid. In the GST times, the cost of goods sold will get reduced by credits.
It is assumed that the proposed would bring a good effect on the warehousing strategy also. Since most of the pharmaceutical industries today maintain warehouses (in spite of additional operating expenses) in different states to avoid the CST impact. Post GST, they needn’t worry about the same. Thus, they can maintain warehouses at strategic locations. It is also possible that pharmaceutical giants consolidate their warehouses and reduce operational expenses. This will happen across the sector regardless of the size of the company.
It will be quite interesting to see how the things happen?
Since the government has shown the intentions of implementing GST w.e.f. 1st April 2016, it will be quite interesting to see the change happening in next six months. Industries closely watch the happenings around and the recommendations of the steering committee about things like dual threshold and exemption in the GST regime. Also, it will be very interesting to see the recommendations about Revenue Neutral Rate for GST and SGST.
It is critically important to create an awareness of it amongst key stakeholders such as distributors, suppliers, and buyers. The internal stakeholders i.e. employees should also be well-informed about the plan and progress of the same. What will be the stand of the company in case of major cost implication should be clear to them.
Experts iterate on the need of timely preparation for GST. They fear that failing to do the same would result in potential business risks and reputational and compliance threats. It is the duty of the top management to look into the matter.
Mapping IT systems with reference to GST will also be a great challenge. They need to be made compliant for it.