GST and Indian Healthcare
Marmik Shah is the Founder Partner of the M A A K & Associates (Chartered Accountants). He is Fellow Member of Institute of Chartered Accountants of India, New Delhi. Presently, he is handling the Taxation, Business Structuring, Statutory and Internal Audits and other assignments of various clients. Advice on Trade Marks, Copy rights, Sales Tax & VAT issues, Certifications, affairs of Not for Profit Organizations, designing of Investment Portfolios etc.
GST a loan waited game changer is now about to become a reality for Indian economy. Talking about the world’s second largest population and huge health care market, the GST is going to make or mar the industry. With positive move of One Indian One Tax, the rates and procedure is going to ultimately decide the result of GST.
Introduction to Indian Taxation System
The Indian Taxation system is one of its own types in the world with numerous taxes and complex compliance system. And perhaps very few in the country actually understand the complete taxation system. While the entity has to collect and pay huge amount of taxes, what is more difficult is the compliance system of the country. The continuous efforts of various government for years has been to make the system simple and industry friendly has ultimately resulted in implementation of GST.
It all started with establishment of empowered committee headed by Asim Dasgupta in the year 2000 by the Vajpayee Government. The UPA1 and UPA2 government took it forward and finally after a very long time in 2016 again NDA government is going to implement the same.
General Expectation from GST
While manufacturers are quite optimistic about the new tax law, commoners are not sure how it is going to impact their lives as yet. The expectation form GST is to simplify and streamline the tax structure in India.
The industry in general feels that this is a milestone for Indian economic development and will provide a huge fillip to manufacturing. This step is also expected to accelerate prime minister’s ‘Make in India’ initiative and lower prices for the consumers. The immediate impact of GST may also increase the cost of finished products in some sectors, however in the long term this would prove beneficial to the industry and consumers, and augur well for our overall economic development.
Indian Healthcare Industry
The emerging economy of India is one of the largest producers of generics, and also experiencing a boom in medical tourism which generates additional returns for the healthcare industry. Globally India’s pharmaceutical industry currently is ranking in the top 5 in terms of volume and top 15 in terms of value. To provide the required healthcare facility to the growing population of the country, the government has raised the FDI cap for Brownfield Pharmaceutical investments to 74% in June. Eventually, 100% FDI is allowed in Greenfield Pharmaceutical investments and beyond 74% under government approval in Brownfield Pharmaceutical investments. This step is expected to develop more qualified personnel and provide state-of-the-art facilities and technologies to patients.
Though the rates of GST are recently notified and item wise list is pending, it is expected to have a positive effect on the pharmaceutical sector in an overall sense. The GST is expected to simplify the tax structure, since eight different taxes are levied at state, central and municipal level in the pharmaceutical industry at the moment. GST, by
consolidating all these into one tax would increase the ease of doing business, as well as mitigate the cascading effects of multiple taxes applied on one product. Apart from this, GST will also result in operational efficiency by streamlining the supply chain which can alone add 2% to India’s pharmaceutical market size.
The pharmaceutical companies need to move to a hub-and-spoke model with primary and secondary hubs across states, besides overhauling the process of the companies used to select their warehousing network with cities like Chandigarh, Lucknow, Guwahati, and Nagpur emerging as primary hubs in addition to the metros.
GST implementation will also envisage a seamless flow of tax credit, account for improvement in overall compliance and is also expected to create a level-playing field for pharmaceutical companies in India. A big advantage for companies will be the reduction in transaction costs with the discontinuance of Central Sales Tax (CST). GST is expected to bring down the manufacturing cost and even a 2% reduction in production or distribution cost is believed to add over 20% to profits. GST, if its rate is below the current total tax rate, will eventually help consumers by making healthcare and drugs more affordable which already is a big goal for the Indian Government.
Although, the new tax legislation is believed to bring down the manufacturing cost, it cannot be said with certainty as to how the ultimate consumer will be benefited through this as most of the medicines are available at the MRP which is inclusive of the taxes, how is the end consumer going to benefit from that? It will be ultimately the industry’s call whether to share their profit margin with their customers or not.
India’s healthcare industry is worried that the implementation of the goods and services tax (GST) may lead to higher taxes that could erode its profits, even as it hopes that the new regime will help streamline the supply chain.
GST will help companies rationalize their supply chain. However, if the overall tax cost goes up above 12% there won’t be any savings as such.
GST, once implemented, would put various sectors under the purview of service tax. The list of exempted services presently includes healthcare sector and it is expected to continue after the GST regime at least for initial period until basic cost of healthcare sector becomes affordable to the common man of the country. It is believed that levying service tax on healthcare services and facilities will be a retrograde step and will certainly push back the agenda to provide best in class healthcare.
Overall, the effects of GST implementation on the healthcare and pharmaceutical sector are still uncertain. However, industry experts believe that GST will set industry players and consumers in a win-win situation. In case the tax rate is set at an efficient level, the healthcare industry will benefit as GST certainly reduces complexities and removes many hurdles to the industry’s growth. The industry is on a path of promising growth and increased productivity.