Chapter 1
Plugging input tax credit leakage in pharma and healthcare
As GST reforms in India progress, the pharma and healthcare sectors continue to be challenged by the leakage of input tax credit.
Business promotion strategies in the sector include distributing brand reminders in the form of pens and writing pads to doctors and distributors. Some companies organize medical camps to provide free medical facilities, including medication and vouchers for free treatment, at third-party clinics. The Central Goods and Services Tax Act, 2017[1] (CGST Act) restricts input tax credit on free distribution, gifts, things of personal usage, etc., and the resultant block in the input tax credit chain is adversely impacting the sector.
Similarly, input tax credit is restricted to goods lost or destroyed. As research or testing and expiry of goods is a common practice in the pharma industry, disposal of goods is part of regular business operations. Construing such events as ‘loss or destruction’ instead of ‘usage or consumption’ warrants a revisit to prevent loss of input tax credit.
The CGST Rules[2] limit income tax credit refund based on export turnover being 1.5 times of the domestic turnover. This limitation may be revisited because there are conditions in which the export market appreciates the sale price of goods. GST reforms in India should take a re-look at refund provisions to avoid such limitations and restrictions.
Indirect tax reforms must include the healthcare sector as well. Recently, in July 2022, the GST Council has recommended 5% GST rate on bed charges where room rent is above INR 5,000 per day per patient (excluding ICU). Since healthcare services are exempt from GST, an artificial bifurcation to tax bed charges is against the spirit and concept of ‘composite supply’.
This section is written by Suresh Nair, Partner, Indirect Tax, EY India.
Chapter 2
GST on inputs in the power sector
While GST has reduced costs associated with manufacturing and distribution for most sectors, the indirect tax reform’s efficiency can be further improved in sectors, such as power and pharma.
GST, India’s most transformational tax reform in recent times, celebrated its 5th anniversary on 1 July 2022. After five years of GST tax reforms in India, the next phase of the indirect tax should focus on ironing out inefficiencies, which may not only benefit the sectors but also improve the GST reforms’ economic impact.
Given the indelible role that the power sector plays in India’s economic growth, especially the bigger share that renewable energy is likely to have in this, there is a need to further fine-tune GST rules.
Supply of electricity is exempt from GST and so is transmission and distribution of electricity by a transmission and distribution utility. However, goods and services procured for these activities — such as for setting up of power plants, transportation, outsourcing of workforce manpower requirements, etc. — are subject to GST in India. In the absence of any output liability, GST paid on procurement is a cost to businesses and has a direct impact on the profitability of such companies.
In renewable energy, exempting all procurements from GST would cause credit blockage in the hands of the suppliers, which would have larger ramifications.
Therefore, the demand of the power industry is to bring the activities of power generation as well as distribution and transmission of electricity within the ambit of GST.
Levying GST at a lower rate (say, around 5%) is suggested as it permits the units generating electricity to apply for refunds on account of the inverted duty structure. A similar scheme could be implemented for units engaged in transmission and distribution of electricity. Such a measure would help these businesses reduce costs and provide electricity to consumers at reduced tariffs.
This section is written by Achal Chawla - Partner, Indirect Tax, EY India.
Chapter 3
GST streamlined taxes for Medium, Small and Micro Enterprises (MSMEs)
GST has given many MSMEs a fillip through its uniform tax structure.
An integral component of the nation’s backbone, MSMEs, are ubiquitous in nature and the largest employment generators in India. Their contribution to the nation’s GDP and exports are key reasons why the federal and state governments have been introducing measures for their sustained growth. The introduction of GST for MSMEs has positively impacted the sector.
During the VAT regime, tax compliance costs and burdens were higher for MSMEs. This was largely due to the multiplicity of taxes, cascading levy, high rates, and numerous compliances. The impact of GST on MSMEs was big, as most taxes were subsumed, and a uniform process was established. A key GST benefit for MSMEs is the composition scheme that allows smaller businesses to pay a fixed rate (1–6%) on their turnover without the hassle of paperwork. Other changes, such as mandatory audit exemptions, registration thresholds, reduction/exemption of GST on goods made by MSMEs, were also implemented. As a result, MSME GST registrations have seen an uptick.
In July 2020, a crucial change was enacted when the core definition of an MSME was revised. Prior to the amendment, units with an investment in plant and machinery up to INR 10 crore qualified as MSMEs. However, the change has made the category far more inclusive, as it now encompasses all such investments up to INR 50 crore and turnover up to INR 250 crore. As a result, more units can avail of the benefits available to MSMEs.
The development of the MSME sector is a clear sign of the set priorities of the government. Their continued support is the key to a holistic development of industries and people.
This section is written by Bhavesh Thakkar, Partner, Indirect Tax, EY India.
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Summary
There is no doubt that when the Indian history is written a few years later, GST reforms may be viewed as catalysts that drove development and growth. These are initial years and further nurturing is required to enable the baby to mature and become a forwarding-looking, amiable adult who contributes to the general wellbeing of the society.
