How will the revolutionary new Goods and Services Tax affect the pharmaceutical industry in India?
The pharmaceutical sector is highly fragmented in India, consisting of more than 20,000 companies, and expanding significantly over the past few decades. The supply chain is also very complex, involving a large number of middlemen. In the most critical indirect tax reform measure taken by the Indian government since the country achieved independence, the new Goods and Services Tax (GST) is set to be a game changer. Ultimately, it should create a more efficient supply chain while bringing down costs.
As a healthcare consulting firm that operates in India, we wanted to explore the possible long-term impact of GST on the industry.
With the implementation of the GST, which took effect on July 1, 2017, the traditional distribution model is meant to be replaced as the inter-state transaction between two dealers would be tax free. The GST has revolutionized the taxing system in India. It has replaced 17 federal and state taxes with one uniform tax, thereby resulting in ‘one nation, one tax’.
Before the introduction of GST, the VAT (value added tax) for formulations was at 9%. For pharmaceutical products, it was 5%, and an additional 12.5% was charged as excise duty. On average, medicines were on 9% tax, including excise duty and VAT. The VAT was charged at the maximum retail price and was not charged along the distribution channel. As a result, distributors were not paying any taxes.
Up until recently, the pharmaceutical industry has been suffering from the accumulation of credit due to the higher excise duty on finished products when compared with APIs (active pharmaceutical ingredients). Also, the import duty on finished products was higher compared with the APIs, resulting in the inverted duty structure.
Now, tax rates have been categorized. Life-saving APIs will be taxed at 5%, other APIs at 18%, and formulations at 12%. Pharmaceutical companies in the special economic zones (SEZs), enjoying special tax structures, will now come under the same tax regime as companies in other locations. Due to the single tax structure, the companies either have to absorb the additional cost or pass on the costs to the distributor/retailers and consumers.
The supply of free samples to doctors, world health organizations, and to non-governmental organizations will be taxed under GST. These transactions will be taxed based on comparable sales prices and number of units. This kind of taxing could be complex to execute.
The National Pharmaceutical Pricing Authority (NPPA) revised the prices of 761 essential drugs by removing the excise duty and VAT levied on their ceiling prices. The other prices of medicines without excise duty remain the same. So, the new prices as per the GST would increase the ceiling prices of the medicines by no more than 2-3%.
As GST continues to be rolled out, the tax barriers on cross-border sales will be removed. This eliminates a firm dependency on a warehouse in every state or the paying of a Central Sales Tax (CST) on the direct sale of goods to the distributor in another state. As a result, the price of the products (with the exception of the distributor and the retailer margin) will reduce.
Consider two scenarios: pre and post-GST, to understand how the price of a medicine would vary. For simplicity’s sake, the input tax credit will not be taken into consideration.
Scenario 1: Before the introduction of GST. In this scenario, the product is not directly sold to the distributor.
(includes logistic cost)
|VAT||Total tax||Final price|
Scenario 2: After the introduction of GST. Let us assume the price of the product has increased by 2%. In this scenario, the firm has directly sold the product to the distributor in another state.
(includes logistic cost)
|Margin||Input tax credit||Price
|GST||Total tax||Final price|
The introduction of GST is set to revive the tax system in India. It will bring in more players into the organized sector, improve the way of doing business, and boost the economic stability of the country as more individuals will be accountable to pay tax. Although GST is a short-term pain that may pose a number of complications, it surely will be a long-term gain for our country, for our industry, and for our patients.