• Bengaluru
  • 10 November 2016
  • Views
  • By Dr. Rajeev Boudhankar, Chief Executive Officer, Bhatia Hospital

Effects of GST on India’s Healthcare Industry

GST is expected to have a positive effect on the Pharmaceutical sector

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Dr. Rajeev Boudhankar, Chief Executive Officer, Bhatia Hospital

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 14th largest in terms of value globally. As 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, 5% of the GDP is spent on Healthcare - 4% by the private sector. The Indian Healthcare Industry has been exponentially growing in the 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 brown-field Pharmaceutical investments to 74% in June. Eventually, 100% FDI is allowed in green-field Pharmaceutical investments and beyond 74% under government approval in brown-field Pharmaceutical investments.

Recently, the passing of 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 its effects 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. As Healthcare expenditure increases, so do the tax revenues for India. Recently, India's Government decided to implement GST, which will subsume a number of taxes of the complex State and Central Tax system in India into one uniformed tax system.

Effect on the Pharmaceutical sector
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 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. In my opinion, 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 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 is applicable on all phases of the supply chain, it is not clear how this will influence free-drug samples, bonus schemes by manufacturers, 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. In addition, it will benefit 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.

Effect on the Bio-medical Equipment and Devices sector
One of the major concerns of this industry is the current inverted duty structure that adversely affects domestic manufacturers, cost of inputs being higher than output. This discourages investment in this industry. GST may either remove the inverted duty structure or allow refund of accumulated credit. This would be a boon for this industry and can act as its growth catalyst.

The current cascading tax structure on import duty makes it expensive for the industry to import machinery. GST is likely to reduce this cost.

 

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