Pharma industry is looking forward to crucial changes in the Budget 2018, especially in the area of indirect taxes, to give a fundamental boost to the recent sluggish growth trend, said Santosh Dalvi, Partner, Indirect Tax, KPMG India.
The sector has witnessed good growth in the last decade due to the momentum gathered by various government policies. However, the industry mood seems to be changing due to not so impressive budgets in the recent past and impact of the Goods and Services Tax (GST).
Therefore the foremost change desirable for the sector would be to reinstate the concessional customs duty on selected drugs withdrawn by the government in January 2016. Few drugs which inter alia formed part of the National List of Essential Medicines (‘NLEM’) 2015 are subjected to basic customs duty at 10% after the exemption granted to these drugs was withdrawn. This has directly impacted the margins of the importer companies as drugs falling under the NLEM are generally used for public healthcare and hence, are subject to price control. Given the heavy reliance on imported drugs for public health, the pharma sector would expect that the concessional customs duty be reinstated in the Budget, Dalvi told Pharmabiz in an email.
Import of medical devices attract customs duty at 5%. However, with growing focus of the government on ensuring end-to-end healthcare set-up, it would be imperative to exempt import of such devices required for life saving diseases from customs duty, he added.
Another focus area of the pharma sector relates to ‘contract research’, which has been on the rise and showcasing India as a global hub for cost-effective research activity. However, the service being performance-based, is taxed at the place where it is actually performed thereby subjecting it to service tax at 15% and now GST at 18%. This makes the service less competitive in the global market. In order to boost this industry and improve cost efficiency, it is expected that such services are treated as export and not subject to GST, he said.
The sector is also facing challenge in relation to GST reversal on sales return of expired and damaged stock. GST on goods returned can be reversed if the goods are returned latest by September following the end of the financial year in which the goods were supplied. Generally, in pharma, most of the products have 3 year expiry and hence, it is possible that near to expiry or expired stock is returned only after 2 years from the supply. In such scenario, the GST component cannot be reversed while issuing the credit note. If the recipient is not eligible to claim input credit, then such GST is a cost. While the Government had recently clarified that the return of expired and damaged stock will not be treated as a supply and will not attract GST, the industry would also expect that favorable clarity is provided on the reversal of input credit in such business scenarios, explained Dalvi.
Lastly, refund of input taxes has remained the top priority as any delay therein results in blockage of working capital. Unfortunately, the situation was no better with GST. The government needs to speed up the entire refund process so as to reduce the strain on cash flows of the exporters.
This Budget is not expected to tweak GST rates. But if crucial changes are implemented, it would be a win-win situation for both the government and industry, said Dalvi.