IMPACT OF GST ON INDIAN PHARMACEUTICAL INDUSTRY

A revolutionary indirect tax system known as the GST (Goods and Services Tax) was
recently implemented by the Government of India on 1st July 2017. This caused a paradigm
shift in the way in which duties were implemented across sectors. One such sector, for which
GST proved to be a game-changer, was the Indian Healthcare Sector, which is evidently
marching towards $150 billion by the end of this year.

KEY HIGHLIGHTS OF THE SECTOR

 Currently stands at a market size of $27.57 billion and is 3rd largest in the world in
terms of volume and 14th in terms of value.
 Expected to reach a mark of $55 billion by 2020 at a CAGR of 15.92%, according to
a report by the Indian Brand Equity Foundation (IBEF).
 Pharmaceutical exports stood at US$ 16.4 billion in 2016-17 and are expected to grow
by 30 per cent over the next three years to reach US$ 20 billion by 2020, according to
the Pharmaceuticals Export Promotion Council of India (PHARMEXCIL).
 Principal supplier of generic drugs all over the world, with 80% of all AIDS drugs
produced in India. The UN has provided licenses to six Indian pharmaceutical labs to
make generic anti-AIDS medicine for all the developing nations. Indian
pharmaceutical companies manufacture 20% of all generic drugs used around the
world.
 India has 2,633 FDA-approved drug products. India has over 546 USFDA-approved
company sites, the highest number outside the US.
 Indian companies received 55 Abbreviated New Drug Application (ANDA) approvals
and 16 tentative approvals from the US Food and Drug Administration (USFDA) in
Q1 of 2017. The USFDA approvals are expected to cross 700 ANDA in 2017, thereby
recording a year-on-year growth of 17 per cent. The country accounts for around 30
per cent (by volume) and about 10 per cent (value) in the US$ 70-80 billion US
generics market.
 Indian pharmaceutical firm, Eric Lifesciences Pvt Ltd, has launched its initial public
offering (IPO) worth Rs 2,000 crore (US$ 311 million) in June 2017.
 Indian pharmaceutical company, Cadila Healthcare Ltd, has raised Rs 1,000 crore
(US$ 155 million) via a qualified institutional placement (QIP) of shares.
 The Government of India plans to set up a US$ 640 million venture capital fund to
boost drug discovery and strengthen pharmaceutical infrastructure. The ‘Pharma
Vision 2020’ by the government’s Department of Pharmaceuticals aims to make India
a major hub for end-to-end drug discovery.
ADVANTAGE GST

 Nearly 17 federal and state taxes have been replaced with one uniform tax, thereby
eliminating the troubles arising out of multiple taxes. This has simplified the process
of tax filing and in general the taxation system.
 GST has improved the operational efficiency by rationalising the supply chain that
could alone add 2 percent to the country’s Pharmaceutical industry by the end of this
year.
 Improved distribution networks and seamless flow of tax credit has levelled the
playing field for pharmaceutical companies in the country.
 Reduction of overall transactional costs with the withdrawal of CST (Central Sales
Tax) which would in turn lower the manufacturing costs, leading to benefits for the
buyers.
 Overall reduction in the cost of technology. Duty charged on the import of costly
machines and equipment is allowed as credit after the implementation of this taxation
structure.
 Improvement in maintaining warehouses at strategic locations has reduced operational
expenses incurred at the time of Central Sales Tax.
 A lot of the times, medicines are provided without bills in India. GST would curb
such practices as providing medicine without the bill would not be beneficial for
anyone in the distribution chain.
 Rehab products, surgical belts or knee caps have seen some price relaxation as these
products with the 6% VAT earlier, are now taxed 5% only.
 Cost of medicines and services, insurance and international travel has reduced
resulting in better prospects of attracting medical tourists more to the country.

SOME MAJOR CONCERNS

 Prices of medicines and surgical equipment have increased by 5% to 6% on an

average. Most of the medicines, which had 2% to 5.5% VAT, are now charged 12%
tax under the GST regime.
 Area-based exemptions enjoyed by the pharma companies by setting up their units in
some specific locations no longer exist, which has increased the cost, thereby
burdening the end consumers.
 Ayurvedic drugs or medicines were charged an average VAT of 4% and excise of
1.5% due to the excise free manufacturing zone benefit. Under GST, Ayurvedic
medicines have gotten costlier as they are taxed at the rate of 12%.
 Since the distribution channel was not involved in the payment of tax and filing tax
returns, they will now need to get registered and file the minimum 37 returns annually
as required under GST. This would lead to delays in procurement of inputs and
delivery of output.
 The bill has impacted bonus schemes, return of expired drugs and the free sample of
drugs. Thus, the companies are forced to redesign the incentive scheme from scratch.