The goods and services tax (GST) will prove to be a big plus for pharma exporters.

Companies that are importing active pharmaceutical ingredients (APIs) – especially for their units located inside a special economic zone (SEZ) – will get credits under integrated goods and service tax (IGST) and customs tax, according to pharma industry officials.

"Also, while companies buying APIs domestically may not get customs credit they will definitely get IGST credit," said a senior pharma industry executive.

Having said that, the executive said, the GST regime can be detrimental to pharmaceutical companies that have over 50% revenues from the Indian market.

"Rebalancing the portfolio for such companies could be a challenge and could see a business impact of about Rs 100 crore. Companies will obviously pass on the cost to customers," he said.

Pharmaceutical companies – Sun Pharma, Cipla, Lupin – were unavailable for a comment.

The general consensus of advisory firms is that tax rates are on expected lines but a clarity on its impact on the pricing of life-saving drugs is still awaited.

However, Jignesh Ghelani and Rohit Jain, partners at Economic Laws Practice (ELP), said after taking into account the pre- and post GST scenario, "prices of lifesaving drugs are likely to go down by around 2% max."

The ELP executives said that under the existing tax regime specified lifesaving drugs are exempt from entire customs duty and excise duty. Bulk drugs used in the manufacture of these lifesaving drugs are also exempt. In case of value added tax (VAT) these goods are either exempt or attract minimal VAT rate of 5% and or 6%, depending on the state-specific provisions.

"Under the GST regime however, lifesaving drugs are subject to a tax rate of 5%. This is indeed a positive move. Levying tax on lifesaving drugs at a lower rate under GST regime vis-à-vis being exempt from excise should be beneficial to the companies as it will help to liquidate the input tax credits under the proposed GST regime, which was a cost in the present regime," the ELP executives said.

However, from sourcing standpoint, that is, goods used in manufacture of such lifesaving drugs, GST rate needs to be evaluated basis its tariff classification and the same may possibly attract a higher rate of GST.

"The issue of inverted duty structure would, therefore occur in manufacture of lifesaving drugs, in which case the company may either utilise the excess input tax credits against output tax liability or claim refund.

S Satish, executive director, RSM Astute Consulting Group, the GST rate is 12% on pharma formulations and 18% for APIs while it is 5% for lifesaving drugs. "The likelihood of an inverted duty structure for formulation companies, with input taxes being higher than output taxes, is a cause for concern for the industry. Of course, the MRP-based tax regime will be a thing of the past and we will be migrating to a transaction value system which will truly be a value-added tax regime," said Satish

Suresh Nair, tax partner, EY India, said, pharma firms would focus on ensuring that tax efficiencies under GST regime are effectively captured to negate the increase in effective tax rate.

"It would be relevant to examine whether the exemption hitherto available for specified APIs (inputs) used in manufacture of exempted formulations would continue or otherwise. The concern of inverted duty structure is sought to be addressed through the refund provisions. The treatment for area-based exemption units would be the next key watch out area for the industry," said Nair.

Archit Gupta, founder and chief executive officer, ClearTax.com, said that drugs that treat malaria, HIV-AIDS, TB and diabetes are in the 5% bracket. "Nicotine is also taxed at 5% while nicotine gum is at 18%. So, we can expect a marginal increase in the prices of certain medicines. It is contrary to industry expectations, which was gunning for zero tax, but it will not be an adverse effect. The bigger problem for the pharma industry is ensuring that its entire distribution chain transitions to GST on time. Currently, under VAT, the tax is levied on the MRP on medicines. Distributors, therefore, did not have to pay VAT. But under GST, the entire chain will have to file taxes online, which could be a big pain point for such a vast and layered sector," said Gupta.

...& ANALYSIS

  • Companies importing APIs will get credits under integrated goods and service tax (IGST) and customs tax
  • The tax rates are as expected but clarity on its impact on the pricing of life-saving drugs is awaited

ELP was quoted in one of the leading Indian daily newspapers - DNA India.