As per a report by Equity Master, the Indian pharma industry is the third largest in terms of volume and thirteenth largest in terms of value. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. With 70% of the Indian market share, generics drugs form largest segment of the Indian pharma sector. The industry is characterized by majority of manufacturing plants located in the excise exemption zones. We here discuss how this industry will be impacted by GST.
GST rate for API and formulation – a key watch out area
The industry has traditionally been plagued with an inverted duty structure. Most of the formulations attract excise duty @ 6% with API attracting rate of 12.5%. This has lead to accumulation of credits. So under GST, rate for API and formulations will be the key watch out area.
Another important provision under GST is allowance of refund in case of inverted duty structure. If the rate of GST on formulations stays less than API leading to accumulated credits, the manufacturers would have an option to claim refund of such accumulated credits. However it needs to be seen how the formula would be provided to compute eligible refund amount.
No More MRP based valuation
GST foresees a transition from MRP based valuation to a transaction value regime for all products. This should resolve the issues relating to MRP based valuation and will effectively decrease the price of final products. The duty implications on manufacturers will reduce and will get distributed down the value chain.
Fate of central excise area based exemption schemes
Various companies in the recent decade or so have set up manufacturing plants in hilly and north eastern states to enjoy central excise exemptions. Some units have completed their 10 year exemption holiday and are now finding it difficult to sustain. Post GST, all these exemption schemes are expected to be converted into refund schemes. The final blueprint on how the exemption scheme will continue is awaited.
It is also important to note that these companies will have to undertake significant GST transition preparation before GST roll out. Since they will become taxable under GST, they will be eligible to claim credit of Excise duty on paid inputs, WIP and finished goods in stock on the GST transition date. Adequate documentation will be required to support the credit availed and the benefit will have to be passed on to the customer.
Taxability of free supplies
Distribution of pharmaceutical samples is a common practice among all pharma companies. Such free samples current attract Excise Duty but are not subject to VAT. Under GST, free samples would not be subject to GST but would entail reversal of input tax credit pertaining to free samples
No more requirements of open warehouses in each State
Various companies follow a policy of opening warehouses in multiple states to save the 2% CST cost. With CST being subsumed in GST, such practice would no more be prevalent under GST regime. Further, stocking goods outside the State would entail blockage of working capital as inter-state stock transfers would be subject to GST.