COVID19 has applied sudden break to halt all industries except few. Pharma is one of the exceptional industries wherein some activities are happening being essential in the current crisis. Though pharma industries are allowed to function during the lockdown, many challenges like, transportation of employees, movement of active pharmaceutical ingredients (API), movement of finished goods and sourcing of required bulk drugs have slowed down the production and supply. Substantial amount of APIs are being imported from China. In the present crisis, pharma companies are finding it difficult to import not only from China but from other countries also.

Indian pharma companies are gaining global attention presently because of demand for Hydroxychloroquine (HCQ). India is the major supplier of HCQ to the world. The manufacturers of HCQ are putting their best to increase the production capacity to meet the current demand.

COVID19 followed by lockdown in most parts of the world will change the dynamics of the business. Some industries may suffer even in the medium term and for some other industries this may be a fire in the tail. Just like GST has changed certain ways of doing business, even COVID19 will also change the ways of doing business in days to come. More business can be expected through online flatforms, meeting through web, working from home etc. Priorities may change across the section. People may become more health conscious. Just like business activities, even certain health treatments have also got deferred at present. These aspects shall give boost to the pharma industries.

Another issue is that since it is believed that COVID19 has originated from China, some countries have their own reservation to continue their manufacturing activities in China. India is anytime an alternative to China because of the cheap labour and lesser cost of operation. Indian population is also much younger compared to China.

What is expected from government?

1. Exempt PPEs and personal hygiene items from GST: Presently there are lots of requirements for Personal Protective Equipment (PPE). Similarly, there is demand for personal hygiene items like hand sanitizers etc. All these items which are required to fight COVID19 must be exempted from GST.

2. The government should facilitate the setting up of industries by foreign entities: Faster and easier approvals and sanctions, availability of land, electricity etc. Govt should initiate the talk with global manufacturers to attract them to India.

3. Remove inverted tax structure by reducing the GST rate on APIs to 12%: For pharma industries, inverted tax structure is a persisting problem. Even in the earlier tax regime also, most of the pharma final products were taxed both under Excise law and VAT law at lesser rate while the APIs were taxed at higher rate. Now in GST also most of the APIs are liable for GST of 18% whereas most of the medicaments are liable for GST at 12%. This will affect the working capital severely.

4. Refund of GST on capital goods: Presently input tax credit (ITC) on capital goods is not eligible for refund of ITC when exported under LUT. This restriction should be removed to enable the revival of the industries from the current crisis.

5. ITC on construction of factories and office premises: Presently ITC is restricted on inward supply of goods and services which result into immovable property other than plant and machinery. This restriction should be removed. This will enable to overcome the liquidity crunch while setting up of new factories and offices. Indirect way of financing by the government. This will induce the business houses to expand their activity thereby will generate more revenue to the government.

6. Allow ITC with regard to expired medicaments: Presently when medicaments are returned back by the chemists, either the manufacturer cannot take the ITC on the same (where received under tax invoice) or cannot reduce his outward tax liability (where received under credit notes). The expired goods are genuine cost to the manufacturer. Since pharma is a well organized and well regulated industry, every activity can be well monitored for misuse of ITC, if any.

7. Clarity on ITC on Physicians samples, sales promotional items, staff welfare activities: ITC provisions provide restrictions on goods disposed of as free samples and goods and services used for personal consumption. Many cases these restrictions are blindly applied to disallow the ITC on the above goods and activities, thereby discourage such activities. Increased purchases and economic activities result in increased tax collection to the government. Thus, instead of discouraging the spending, the government should encourage the spending both in business as well as in personal life.

8. Classification of pharma products should be simplified: Classification of pharma products have been a challenge even during earlier tax regime which has lead to increased litigation. There is a thin difference between medicaments and nutraceuticals. Medicaments generally attract lesser GST rate whereas nutraceuticals attract higher GST rate. Hence, there is a tendency to classify nutraceuticals as medicaments thereby leading to litigation. Nutraceuticals may have prophylactic value also like some medicaments. There should be uniform rate for all medicaments and nutraceuticals.

9. Incentive by way of refund route: Similar to earlier schemes by way of refund of excise duty/VAT in case of newly set up factories in certain areas, the government should continue with such similar scheme. This will encourage the industries going for expansion to remote areas. This will result in de-urbanization of industries and generate employments in those areas also. 

If the above steps are taken by the government, the pharmaceutical companies in India are surely going to contribute a lot to Indian economy in days to come. The existing problems of unemployment, flattened exports etc can be addressed by such measures. State government may also come out with many incentive schemes strengthen the industries, including pharma companies.

Disclaimer

The views expressed herein are the views of the article writer and cannot be used in framing of opinions or devising methodologies for the purpose of compliance without an independent evaluation- vasant.bhat@hiregange.com.

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