India is not only one of the largest producing countries for generics, but further experiencing a boom in medical tourism which generates additional returns for the Healthcare Industry. India’s Pharmaceutical Industry currently is 3rd largest in terms of volume and 13th largest in terms of value globally as per a report by Equity Master. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 percent of global exports in terms of volume. As the population is continuously growing, so is the need for good Healthcare Services, which brings the need of developing more qualified personnel to fill the current gap in the sector and providing state-of-the-art facilities and technologies to patients. In India, 3.89% of the GDP is spent on Healthcare – 2.5% by the private sector. The Indian Healthcare Industry has been exponentially growing in recent years, and the Ministry of Health targets the development of 50 new technologies by the end of this year to treat diseases, such as cancer and tuberculosis. To attract more foreign direct investment (FDI), the Government 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.
In 2017, Indian government passes the most awaited Goods and Services Tax (GST) Bill caught the attention throughout all industries in India. It should benefit most sectors and make taxation easier as it replaces several different duties and taxes.
What will be the impact of GST on India’s Healthcare Industry?
The Healthcare Industry in India has become one of the largest sectors in the country in regards to employment and revenue. Healthcare expenditure increases, so do the tax revenues for India. Recently, India’s Government decided to implement GST, which will subsume several taxes of the complex State and Central Tax system in India into one uniformed tax system.
GST is expected to have a positive effect on the Pharmaceutical sector. It will help the industry by simplifying the tax structure since eight different taxes are levied in the Pharmaceutical Industry at the moment. A consolidation of all these into one tax would ease 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. Because GST will help Pharmaceutical companies rationalize their supply chain, they will have to review their distribution networks and strategy. Additionally, GST implementation will also envisage a seamless flow of tax credit, account for the 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.
The Industry’s present concern is that the rate of GST should be kept at a competitive level in the lowest slab for Pharmaceuticals. Industry analysts speculate a GST rate of up to 12% will have a neutral effect whereas anything above will have an inflationary effect on pricing in the Pharmaceutical sector in the short term. Additionally, it is uncertain if the Healthcare sector, as well as life-saving drugs and medical devices and healthcare services, will continue to be exempted from taxation once GST is implemented. Until now, life-saving drugs were exempted from Excise and Customs Duties. Some States currently charge 5% taxes on medicines, this may change overall with GST. The Government should continue the tax and duty incentives which have been already provided, such as the exemption of excise duties in the North-East States and Jammu & Kashmir, etc. for manufacturing units, as huge investments have been made and the loss of incentives will negatively impact local economies. As GST applies to all phases of the supply chain, it is not clear how this will influence free-drug samples, bonus schemes, inter-state movement of expired products or stock transfers.
On the other hand, Pharmaceutical companies will experience improved operational efficiency, reduced manufacturing & transaction costs as well as improved compliance. Also, it will benefit the Pharmaceutical companies’ warehousing strategy. As of now, companies kept warehouses in different States to avoid CST of different States. Now, with CST subsumed under GST, they can consolidate warehouses at strategic locations as they will only have to pay Integrated GST (IGST) on inter-state supplies of Goods and Services.
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. The Healthcare Industry, in case the tax rate is set at an efficient level, 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.