The taxation structure pertaining to indirect taxes is quite intricate in nature with multiple taxes being levied by Central and State Governments across the country. In the context of pharmaceutical industry, some of the important taxes levied by Central Government in the current regime include Service Tax, Central Excise duty, Custom duty etc. Apart from the taxes levied by the Central Government, State Governments levy taxes on goods at the point of sale, some of them being VAT, Octroi, and Entry Tax etc. With India on the brink of a historic tax reform, it is expected that a robust implementation of GST will be able to relieve the cascading effect of the present indirect tax regime. Further, it is anticipated to streamline the multiplicity of taxes imposed by Centre and the States, paving the way for a transparent tax mechanism for foreign investors functioning in the inter-state commerce. It is forecasted that the healthcare sector would benefit on account of removal of the inverted duty structure. Implementation of GST is expected to overrule certain tax exemptions that aid cost reduction in cost of services for consumers.
With GST at the helm of indirect taxation structure, exports of goods and services would be zero-rated, as levied on the domestic goods and services, would be imposed on imports. Apart from the market players, customers also stand to gain with the biggest advantage being reduction in the overall tax burden on goods. This is likely to make Indian products competitive in both the domestic as well as international markets.
The healthcare sector in India can be categorised into, pharmaceutical, medical insurance, medical imaging, biotechnology, telemedicine and hospitals. However, the most prominent role in played by the pharmaceutical industry. The pharma companies are research-oriented and possess the arsenal to affect a country’s economy by developing innovative therapies that can replace conventional and less-effective. The largest percentage of funds allocation to healthcare sector continues to be diverted towards advancement of pharmaceutical sector.
It is anticipated that GST would be beneficial for drug manufacturers in the country as its primary objective is the unification of multiple tax structure which is expected to bring in much needed operational efficiency. On the flip side, if the GST rate on drugs goes above 12%, it is likely to have an inflationary effect on the pricing structure.
But, the pockets of the final customers are expected to take a hit even if the taxes end up being 12%, as against 5% in the current structure. GST is also expected to have an impact on the bonus schemes, free-drug samples and return policies on expired drugs. Pharmaceutical companies would be required put in extra efforts on working out the distribution networks and review their existing sales strategy.
As per specific notifications covered under the bandwagon of central excise law, exemption from excise duty has been benefiting a certain set of life saving drugs/APIs use in manufacture of life saving drugs. Introduction of GST law would subsume the central excise duty. It needs to be ensured that the lifesaving drugs still enjoy tax free status under GST, enabling exemption from IGST on their import.
Experts from various corners of Indian pharma industry expect the issue of inverted tax structure to be completely addressed under GST. With the final GST rates still awaited, a blueprint showcased by the Centre has ensured refund of accumulated credit in case of an inverted tax structure. Ledaing economists have vouched for an improved refunding mechanism for inverted tax structure.
The credit balances that are leveraged under the current tax regime would be transferred under the unified tax structure of GST. Discussing about the stocks of finished goods that are imported from foreign shores, counterveilling duty is not imposed under the current tax structure. Apart from this, the goods procured from contract manufacturers are not admissible under excise duty credit. Hence, stocks are tipped to fall under double taxation under the GST regime.
The blueprint of GST law infers the distribution of IGST/SGST/CGST as a welcome step towards a prodigious future. GST framework does not highlight imposition of SGST of one state against SGST of another state. This is why further clarification is desired on what component of SGST would form a part of IGST.
Pharmaceutical organisations operating in India receive services which are either provided from multiple distinct locations or are received at multiple locations, on a consistent basis. In some cases, a situation might occur where it becomes impossible to determine the source of receipt of a service, for example, in cases of marketing, advertising etc. In such cases, it becomes very tough to gauge if supply of services is inter-state or intra-state. The industry is seeking clarity as it is a critical point pertaining to availment and utilisation of input tax credit by the pharmaceutical entities.
The date on which the recipient showcases reciept in the books of accounts has been comprised under the point of taxation for supply of goods and services. As per the current tax regime, it would be a cumbersome process to track down this date. The blueprint of GST law offers a reverse charge, wherein the date of receipt of invoice as a point of taxation needs to be tracked. Thus, there is a requirement of restricting the stage of taxation to the date of invoice or the date of payment.
GST is collected on value addition of goods and services at each stagein the supply chain. The payment of GST on acquisition of goods and services can be introduced against that payable on the supply of goods and services. the manufacturer will have to pay the applicable GST rate, but until the finla stage is reached, he can claim it back through the tax credit mechanism.
From the standpoint of states, the foremost burden for them is the loss of revenue, which is expected to arise because of two major factors. Firstly, a shift towards GST has led to a destination-based taxation system from the current source-based system. In the current taxation system, the tax is collected from a from a place where supplier of pharma product is situated. However, in the destination-based system, tax is collected from a place where the consumer is located. Secondly, loss of revenue might emerge with the implemenation of GST replacing the number of duties in the current tax regime.
However, certain tax exemptions that reduce cost of services in the current taxation structure might come to a halt with the introduction of GST. This would create a negative impact on healthcare sector, especially from the point of view of customers.
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