Goods and Services Tax (GST) is a major tool for improving ease of doing business in India. It is considered as the biggest tax reform since the time of Independence, and will subsume excise and service tax, and various other local levies including VAT. The passing of this bill has grabbed the attention across all the industries in the country. It is expected to benefit most of the sectors and make the taxation process easier as it will replace a number of different taxes and duties. Indian manufacturers consider this a milestone for Indian economic development and will provide a huge incentive to manufacturing.
The GST council made it as smooth as possible by not raising or reducing the existing tax rate on goods and services much drastically. Moreover, the existing list of items that are exempt from taxes were to be kept intact in the new regime as well. Healthcare, hence, is exempted, when the new GST system kicks in, starting July 1 2017. The scope of GST defines healthcare services as any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India, and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgeries, except to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma.
Furthermore, in the document released on the CBEC website, the following services under healthcare have been exempted:
- Healthcare services by a clinical establishment, an authorized medical practitioner or paramedics;
- Services provided by way of transportation of a patient in an ambulance, other than those specified above.
While the healthcare sector can breathe easy as it attracts almost five percent of India’s total GDP, the pharmaceutical sector may face some challenges, as the medicine rates in the GST regime will be slightly higher than what prevail currently. Until now, life-saving drugs to treat diseases like malaria, HIV-AIDS, tuberculosis, and diabetes, had been exempted from excise and customs duties, and only a few states charged 5% tax on them; but GST has now slotted them mandatorily under the 5% slab, while categorizing formulations into the 12% slab (up from nine percent) and Active Pharmaceutical Ingredients (APIs) under 18%. Moreover, impact of GST on the free drug samples, existing bonus schemes and the inter-state movement of expired products or stock transfers is not quite clear. While the cost may not experience any major fluctuations, the tricky part is for the existing businesses in the industry to migrate into the new administrative regime of GST where they would have to invest a lot of time and effort to accommodate their existing tax credits and stock already circulated in the economy/market. Furthermore, in most of the states VAT on pharma products is charged on the maximum retail price (MRP), and is charged at a single point. Due to this, the distribution channel does not pay VAT; neither does it file tax returns. They will now need to perform this daunting task of getting registered and filing minimum of 37 returns annually as required under GST.
Industry experts, although have mixed opinions about GST, were hoping that there would be a reduction in the tax incidence on pharmaceutical products. This reduction would eventually have helped in reducing the medicine prices and impacted patients positively. But the situation is quite different. The combined excise duty and VAT on a pharmaceutical product for retail sale as of now is about 9% of MRP (with the tax on inputs for bulk drugs fixed at 12.5%). The Supreme Court has ruled that there cannot be a formulation with two different prices available in the market. Expecting such a scenario in the transition period to the GST regime, the Department of Pharmaceuticals was urged in end of the financial year 2016 to direct the National Pharmaceutical Pricing Authority (NPPA) to notify the revised ceiling prices as soon as the GST rates are announced. However, pharma companies will be paying 80% more taxes on average medicines in the new indirect tax regime, which will ultimately be extracted from consumers. This will lead to the medicine costs to go up by 4%.
In general, the impact of GST on the healthcare segment is still indeterminate. Some industry specialists have confidence that post implementation of this bill, customers and industry players will be in a win-win situation. The healthcare industry would benefit from passing of the GST bill as it would reduce the complexities and various obstacles to the growth of business to a large extent. On the other hand, patients/consumers are going to be burdened with the increased medicine costs.