Medicines, excepting the essential ones, could get costlier from July onwards with the roll-out of the Goods and Services Tax (GST).

"The effective tax rate is between 9 and 10 percent; with the rate now fixed at 12 percent (formulations or finished drugs), there will be some price inflation. Either we have to pass it on to the customer or we have to take a hit on our profits," said a top executive from a Mumbai-based drug maker which is a major player in domestic formulation market.

The GST Council finalised the rates for most goods and services last week, paving the way for the implementation of the GST from July 1, 2017.

The Council has decided which goods and services would fall in the various slabs of GST rates, namely 0 percent, 5 percent, 12 percent, 18 percent and 28 percent.

As per the GST rates - life-saving active pharmaceutical ingredients (APIs) will be charged 5 percent, other APIs 18 percent and formulations at 12 percent. An API is a main raw material that goes into the making of a formulation.

"The research-based pharmaceutical industry was hopeful that there would be a reduction in the tax incidence on pharmaceutical products," said Kanchana TK, Director General of Organisation of Pharmaceutical Producers of India (OPPI), the lobby group of big multinational drug makers.

"The industry expected that this would be addressed in the announcement. We believe that this reduction would have helped in reducing the medicine prices and impacted patients positively," Kanchana added.

Inverted duty structure unresolved

The pharmaceutical industry was also disappointed with GST leaving the critical problem of inverted duty structure unaddressed.

Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods.

"The pharma industry has been plagued with the issue of accumulation of credit due to higher excise duty rate on API and lower excise duty rate on manufacture of formulation," said DG Shah, Secretary General of Indian Pharmaceutical Alliance (IPA) which represents big Indian drug makers.

"The disparity in the tax rate has resulted in an inverted duty structure. While GST rates were expected to provide a reprieve to the pharma industry the same is not adequately addressed in the fixation of GST rates," Shah said.

"The government has given a refund mechanism (in GST) which wasn’t available earlier," said Dharmesh Panchal, Partner, Indirect Tax at PwC India referring to input credit on inverted duty structure. "To that extent they have offered a solution, but it is not a perfect solution," Panchal said.

Supply chain disruption

The drug industry, which is slowly overcoming the disruption caused by demonetisation, will be heading for another interruption of business in the form of GST rollout, especially in the month of June.

"In the run-up to the GST with the rates not certain, there was an apprehension about what could be the rate and subsequent MRP corrections," the executive of the pharma company said.

Many stockists ran light on inventory levels and this had an impact on the sales of fourth quarter numbers and effect is expected to continue in the first quarter.

Analysts say there is uncertainty on how much credit input the stockists get on their existing stocks. The GST allows a credit of 40 percent excise duty paid on the product.

"Because on a transition stock, the trade doesn’t want to go through the process (of GST)," Dharmesh of PwC said.

"They want to keep minimum stock to the extent required to maintain demand; this may cause disruption in the short-term," he added.

"We have been talking to some of the leading industry players as well as stockists. Actually, we don’t see a big impact happening in the long-term. Maybe there would be some depression of sales in June, which will be due to stock correction," Prachi Athavale, Vice President, Business Intelligence at AIOCD-AWACS, the market research wing of the All India Organisation of Chemists and Druggists (AIOCD).

"I think we all feel that from July onwards things would normalise," Athavale added.

One industry executive, on condition of anonymity, said that the compliance to GST by July would be tough, and that they were reaching out to the government for a September rollout instead of July.

 23 May 2017, 12:13 PM