Published Editorial

Pharma companies must remodel their supply chain

September 2016

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The Financial Express

By

Suresh Nair
Tax Partner, Life Sciences, EY India

GST is likely to have a far-reaching impact on several aspects of business, including pricing of products and services, supply-chain, IT systems, accounting, tax-compliance framework & re-skilling of talent.

The pharma industry will look forward to continuation of exemption for certain life-saving drugs and Active Pharmaceutical Ingredients used in manufacture of life saving drugs. (Reuters)

GST is a tax triggered business transformation which is expected to be a game changing reform for the Indian economy. It will develop a common Indian market and reduce the cascading effect of tax on the cost of goods and services. It will result in a complete overhaul of the Indian indirect tax system with wide ranging implications including tax structure, tax incidence, computation, payment, compliances, credit utilisation and reporting.

Where does GST stand today and roadmap thereafter

After a long wait, the Constitution Amendment Bill (GST Bill) was finally cleared in both the Houses of Parliament, paving the way for Presidential reference and for ratification by 50% of the state assemblies. The GST Council would come into existence within 60 days from the date of enactment of the GST Bill by the President. It would have a key role in recommending taxable base and exempt products, principles of levy of GST, apportionment of Integrated Goods and Services Tax (IGST), principles governing ‘place of supply’, threshold limit, rates including floor rates with bands of GST and most important, date of application of GST to petroleum products.

The eagerness of the Government to meet the target GST roll out date of April 1, 2017 is quite evident from its proposed move to advance the winter session of Parliament by a fortnight. This would enable an early passage of supporting legislations, in turn leaving sufficient time for the implementation of the said reform. However, a section of industry seems to have doubts about its own preparedness for the same and may need at least six to eight months after the GST Council has frozen its decisions.

Key watch out areas for the Pharmaceutical sector

The rate of GST applicable on pharmaceutical formulations is yet to be finalised, but it is expected that the said goods could be covered the under lower tax bracket of around 12% GST, thereby ensuring that the cost of medicines to the patients could be construed as status quo given that the generic rate applicable under the current law is typically around the same range. The pharma industry will look forward to continuation of exemption for certain life-saving drugs and Active Pharmaceutical Ingredients used in manufacture of life saving drugs.

The Model GST law released in the public domain specifically provides for refund of accumulated credit resulting out of increased rate for inputs vis-a-vis reduced rate of output. This is positive news for the pharma industry, which has been struggling with a high amount of blocked credit in the current regime. Also, special provisions for duty-free movement of goods under job work model, which is prevalent in the pharmaceutical industry and fundamental to its operations, have been provided in the Model GST law.

The Model GST law provides seamless transition of entire credit balance as on the cut over date under the present indirect tax laws into the GST regime. This is beneficial for the industry.

At present, many companies engaged in manufacture of pharmaceutical products have set up their manufacturing units at locations where the central government and the state governments have offered indirect tax exemptions/incentive schemes (such as Baddi, North-eastern states, Jammu & Kashmir, etc.). Continuity of the said area-based indirect tax benefits under the GST regime is critical as this may also indirectly impact the cost of medicines and ultimate price to be paid by the patients.

Since GST on inter-state sale of goods would be creditable, there is an opportunity to remodel current supply chain structure to ensure lower logistics cost and bring in significant operational efficiency which should have a positive impact on the profitability of the companies.

The industry would be looking forward for ease in procedural compliances and upfront clarity on tax positions. The need of the hour is to have clarity on tax positions on transactions such as valuation of inter-state transfer of goods within the same entity, free supplies, patient assist programmes, supplies for destruction etc.

Way forward

GST is likely to have a far-reaching impact on several aspects of business including pricing of products and services, supply chain, IT systems, accounting, tax compliance framework & re-skilling of talent.

It is advisable for the industry to plan its transition to the GST regime in advance to enable the three key objectives-(i) no business disruption as on the cut over date, (ii) 100% compliance of all legal and procedural requirements under the new law, and (iii) managing opportunities effectively to generate business value by plugging leakages in the current indirect tax law.