One of the industries likely to derive the maximum benefit from the GST rollout is the pharmaceutical industry. This is one of the reasons that the industry has already started the preparation for embracing GST from six months ago. The Indian pharmaceutical industry is the 4th largest producer in the world in terms of volume and rubs its shoulders with the countries like USA, Japan and China. The industry like others has its share of problems like CST on raw material, VAT set off limitations and VAT credit accumulations etc.
With the introduction of the GST the first area that the company feels will get addressed is the payment of CST. The CST cannot be set off against any head and increases the raw material cost. The pharmaceutical industry buys raw material from different states and CST is levied on interstate movement of the goods.The import of raw materials post the GST will also be attracting tax. The sourcing strategies for the raw material would have to be formulated by the industry.
Most pharmaceutical manufacturers have warehouses in various states and evidence the movement of finished goods or formulations from one warehouse to the other to save on the CST. They will be able to strategize the position of warehouses with regard to distribution strategies and not for saving on CST with the introduction of GST.
The pharmaceutical industry avails the logistics service for the transportation of raw material and finished goods. The service tax is paid on the logistics which the industry cannot set off at present. With the GST tax credit for logistics would also be available to the industry. This is because both the goods and services are under the ambit of GST.
The active pharmaceutical ingredients (API) attract the excise duty at x per cent. The excise on finished pharmaceuticals is y per cent. With x greater than y, leads to accumulation of VAT credit which cannot be set off or claimed under the current provisions. With the GST which will have a single rate for goods and services, this problem of differential tax credit accumulation is likely to be eliminated.
The APIs used in life saving medicines enjoy a non-levy of excise duty. With the excise duty getting subsumed under the GST law, it would be relevant to ensure that the life-saving drugs continue to enjoy tax free status under the GST. Similar is the case of medical devices which enjoy exemption from CVD/SAD on imports. The same has to be accommodated in the GST.
The loan licensee operations or the job-working is prevalent in the pharmaceutical industry. The current laws do not subject the job worker to be taxed through VAT. Similarly the services provided by him for job working are free from service tax. How this issue gets addressed in the GST remains to be seen.
There are certain zones in the states which have given incentives and offered exemptions from VAT and excise to the pharmaceutical industry. This is likely to be factored through upfront GST exemption or through refund of taxes. Final picture will emerge with the GST roll out clarity.