GST impact! Why pharma companies must revisit their supply chain structure?

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GST impact! Why pharma companies must revisit their supply chain structure?

GST is a tax triggered business transformation which is expected to be a game changing reform for the Indian economy. It will make India a common market and reduce the cascading effect of tax on the cost of goods and service. It will result in a complete overhaul of the Indian indirect tax system with wide ranging implications including tax structure, tax incidence, computation, payment, compliances, credit utilization and reporting.

Key impacts on Pharma industry

The GST rate for Pharmaceutical industry is yet to be finalized but pharma industry is expecting to continuation of exemption for certain life-saving drugs and Active Pharmaceutical Ingredients used in manufacture of life saving drugs and lower tax bracket of around 12% GST.
The model GST will eliminate the existing tax cascading and will be levied on each stage of value addition and will allow tax credit at each stage. This is positive news for pharma industry, which has been struggling with a high amount of blocked credit in the current regime. Also, special provisions for duty-free movement of goods under job work model, which is prevalent in the pharmaceutical industry and fundamental to its operations, have been provided in the Model GST law.

At present many companies set up their manufacturing facilities at locations where the central and state governments have offered indirect tax exemptions /incentive schemes (Such as Baddi, North-eastern states, Jammu & Kashmir, etc.). The above said industry is also expecting about the continuity of these special benefits under the coming soon GST model as this may also indirectly impact the cost of medicines and ultimate price to be paid by the patients.

Under GST inter-state sale of goods would be creditable, will provide an opportunity for the pharma industry to revisit their supply chain structure to ensure lower logistics cost and enhance operational efficiency and profitability.

The industry would be looking forward for ease in procedural compliances and upfront clarity on tax positions. The need of the hour is to have clarity on tax positions on transactions such as valuation of inter-state transfer of goods within the same entity, free supplies, patient assist programmes.

Path ahead

GST will have multi-fold impact on several aspects of business including pricing of products and services, supply chain, IT systems, accounting, tax compliance framework & re-skilling of talent.

So it’s advisable for the industry to plan its transition to the GST regime in advance to enable the three key objectives-(1)No interruption of business (2) ) 100% compliance of all legal and procedural requirements under the new law, and (iii) managing opportunities effectively to generate business value by plugging leakages in the current indirect tax law.

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