An Overview of the Goods and Services Tax
The Goods and Services Tax (GST) is a historic step taken by the Government of India to boost the GDP and introduce a more effective tax regime.
GST is a win-win deal for the whole country. It brings benefits to all stakeholders from industry, government and consumer. It will reduce the cost of goods and services to boost the economy and make products and services globally competitive. By subsuming most central and state taxes into a single tax and allowing set-off of pre-stage taxes for transactions across the value chain, it will reduce the ill effects of cascading and improve the competitiveness and liquidity of businesses.
Article 246A stipulates that Parliament, and, the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
Article 269A of the Constitution stipulates that Goods and Services Tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
GST is a destination-based tax, and it will be levied on the value of goods or services that are consumed within the territory of India. Tax will be collected by the person who is responsible for the final consumption of the goods or services.
The pharmaceutical industry in India was estimated to be worth US$ 42 billion in 2021. India is the largest provider of generic drugs in the world, accounting for 20% of total global pharmaceutical exports. It is also the world’s largest vaccine supplier by volume, accounting for over 50% of all vaccines manufactured in the world. With mega production capabilities at par with industry standards and a large number of skilled domestic workforce, Indian exports meet the standards and requirements of the highly regulated markets of USA, UK, EU and Canada.
By 2021, the majority of pharmaceuticals made in India will be low-cost generic drugs comprising the majority of India’s pharmaceutical exports. Patented medicines are imported. APIs are imported from China (60% of supplies by volume at US$2.4 billion) and Germany (US$1.6 billion) as well as the US, Italy and Singapore. To promote an Atmanirbhar Bharat by enhancing R&D, Make in India product development and high value production capabilities, import substitution and domestic manufacturing of active pharmaceutical ingredients (APIs), the government has launched a US$ 2 billion incentive program which Will run from 2021- 22 to 2027-28.
Major pharmaceutical hubs in India: Vadodara, Ahmedabad, Ankleshwar, Vapi, Baddi, Sikkim, Kolkata, Visakhapatnam, Hyderabad, Bangalore, Chennai, Margao, Navi Mumbai, Mumbai, Pune and Aurangabad.
The impact of GST on the Pharmaceutical industry. The enactment of the much-awaited Goods and Services Tax (GST) Bill caught the attention of all industries in India. It has benefitted most of the sectors and made taxation easier as compared to the current taxation system.
The Goods and Services Tax is having a constructive impact on the Indian pharmaceutical industry as it has increased the manufacturing cost. Most of the drugs mentioned in the 5% tax bracket under GST were earlier in the 4% tax bracket under VAT. This will eliminate the cascading effect of multiple taxes applicable on a single product. Under GST, Ayurvedic medicines may become costlier as they will be taxed at the rate of 12% which was earlier covered by the 4% tax bracket under the VAT regime. Due to this increase in tax rates, the MRP will have to be revised to absorb the overall impact.
GST Rate on Medicines, Effect of GST on Medicines in India, GST on Medical Services, GST on Medical Equipment’s, GST on Hospitalization Charges, and many more. GST levy on pharmaceutical products can range between different tax rates, i.e. nil, 5%, 12% and 18%. The lowest rate generally applies to life-saving drugs and vaccines, while the 18% rate applies to products such as nicotine gum.
1. Nil GST rate on Medicines
The following types of drugs and pharmaceutical products are exempt from GST:
2. 5% GST rate on Medicines
The following types of drugs or medical products attract 5% GST rate:
The above list is only illustrative, and there could be more items on which 5% GST rate is applicable.
3. 12% GST rate on Medicines
The following drugs and pharmaceutical items are subject to a GST rate of 12%:
4. 18% GST rate on Medicines
The following drugs and pharmaceutical items are subject to a GST rate of 18%. This list is not exhaustive :
All Non-Intensive Care Unit (ICU)/Critical Care Unit (CCU)/Intensive Cardiac Care Unit (ICCU)/Neonatal Intensive Care Unit (NICU) room rents in a hospital or clinical establishment in excess of Rs 5,000 per day Will be responsible for GST at 5% (without input tax credit). This is effective from 18 July 2022.
Any medical services rendered by the following ways will attract a nil GST rate:
Use of Intensive Care Unit (ICU) or Critical Care Unit (CCU) or Intensive Cardiac Care Unit (ICCU) or Neonatal Intensive Care Unit (NICU) rooms.
Clinical establishment, or health care services by an authorized doctor or para-medics, other than the above for renting a room, where the room charges do not exceed Rs.5,000 per day, to the person receiving such health care services.
Transportation of patient in an ambulance, other than the services specified above.
The Authority of Advance Rulings (AAR) in Kerala had ruled in 2017 that supply of drugs, surgical items, implants, stents and other consumables to a patient during hospitalization would be treated as a composite supply and S.O. Notification No. 74 of 12/2017 – Central Tax (Rate) dated 28 June 2017. In June 2022, the Tamil Nadu Authority for Advance Rulings issued a similar decision.
Import of drugs attract IGST and customs duty. Following is the bifurcation of applicable taxes:
GST removes the cascading effect of tax which consists of multiple taxes applied on only one product. The costing and taxation system would be easier with only three accounts mountain. It will create a common market for each individual with equal opportunity towards development in different states.
With helpful effect, there are a few unhelpful effects on the pharmaceutical industry:
However, GST has both positive and negative effects on pharmaceutical businesses through various points mentioned above. But the quantum of positive impact is high and the government is still working towards changes to reduce the negative impact and such activity is a continuous process for further improvement. Lack of proper knowledge, training, and infrastructure requirement for the implementation of GST was also a hindrance in smooth implementation of GST but now it is becoming easier and more adaptable.
About the Author :
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.