The introduction of the long-awaited Goods and Service Tax (GST) bill in India is a long-standing idea that has finally seen light of the day. This key fiscal reform introduced by the Indian prime minister has created a lot of buzz in the country. With this move, the Indian Government is on the threshold of major reforms and has taken a significant step in restructuring the country’s overall tax regime. From the tax reformation to the recent demonetization policy, all these reforms will have a significant impact on the Indian economy.
The idea of an Indian GST was first officially proposed in the Union Budget 2006–2007 by the United Progressive Alliance (UPA) government. The GST was not ratified, however, until 2016 when the Indian parliament passed the much-awaited Goods and Services Tax (GST) Bill or Constitution (122nd Amendment) Bill, marking an end to the long and tumultuous journey to streamline India’s fragmented tax system. The government anticipates rolling out the GST between April and September 2017.
A single comprehensive indirect tax levied on the supply of goods and services, the GST will replace India’s current multi-staged tax-structure to help facilitate a common national market. India has one of the world’s most complex taxation regimes with a series of direct and indirect taxes levied by the central and state governments. The income tax collected by the central government falls under the direct taxation regime while the tax levied on the manufacture, provision of services, and consumption of goods falls under indirect tax collected by both the central and state governments.
India’s complex tax structure only worsens the country’s economic fragmentation. Hence, the introduction of the GST is expected to simplify this complex taxation system by subsuming indirect taxes on goods and services levied by the central and state governments such as the excise duty, customs duty, service tax, value added tax, and central sales tax.
The introduction of the GST bill is a significant milestone which would mitigate the cascading effect or double taxation on goods and services in India, paving the way for economic growth. The government plans to create a unified tax market with the passage of this bill, further increasing India’s global competitiveness as an investment destination and improving the ease of doing business in the country. Overall, the government hopes that the GST regime might positively boost the manufacturing sector, improve tax collection and export effectiveness, ease transfer of goods and services across states, check tax evasion, reduce corruption, and ultimately increase government revenues.
Despite a number of modifications along the route to its passage, the final GST bill still lacks clarity in some key areas. The four taxation brackets ranging from 5% to 28% introduced by the government have led to further confusion. The GST council finalized a multiple tax bracket-rate (5%, 12%, 18%, and 28%) for a period of five years while the opposition party had demanded to cap the GST rate at 18 percent.
For the pharma sector, the tax change is expected to be beneficial over the long run. The reform should simplify the tax structure, improve operational efficiency, and decrease the manufacturing cost of pharmaceutical products. Further, supply chain savings should pave the way for warehousing consolidation. The GST should have a positive impact on logistics and warehousing strategies as most manufacturers currently maintain warehouses in multiple states so as to avoid Central Sales Tax (CST) on inter-state movement. With this tax subsumed by the arrival of the GST, manufacturers can choose warehouse locations more strategically, leading to cost efficiency as transportation, labor, inventory and real estate costs decrease. As alluded to, current inter-state transactions would also become tax neutral with the introduction of GST. Additionally, the credits of input taxes paid at each stage by the manufacturer will be carried forward into the subsequent stage of value addition, making GST essentially a tax only on value added at each stage. The final consumer will only be responsible to pay the GST charged by the last dealer in the supply chain.
On the other hand, there are concerns that the GST might spur short-term mild inflation on the prices of medicines. Moreover, the impact of GST in the pharma sector is rate-dependent: a GST rate beyond 12 percent is expected to have a more negative impact on drug pricing, leading to higher drug prices for end consumers. The exact tax rate that will be applicable to pharma remains unknown. Presently, excise duty is levied on pharmaceuticals at the rate of 6 per cent in most states and the value-added tax (VAT) at 5 per cent. Considering this rate, if the upcoming GST rate for the pharma sector is higher than this it would not only be a burden to patients but also impact industry competitiveness. Post-GST implementation, the pharma industry might also face challenges as states that currently enjoy a tax exemption on manufacturing see it removed. There is also uncertainty whether life-saving medicines and medical devices would still be exempted from certain taxes under the new tax regime.
Ultimately, the GST does hold potential promise for the pharmaceutical sector. The introduction of GST might act as a catalyst in improving the economy of the country. It is expected that the upcoming budget will give a clearer road map for the implementation of GST. However, a complete picture will emerge only once the GST is fully rolled out in its final form.