What You Need to Know about the GST Impact on Pharma and Healthcare Industry?

Rajath Kumar

The pharmaceutical and healthcare industry is a significant sector for the Indian economy. In terms of the volume of generic medicines produced, India is the third largest producer in the world and its rank in terms of the industry’s value stands at fourteen. The healthcare segment is expected to reach a valuation of $150 billion by the end of 2017. Like every other industry of the economy, the impact of GST is bound to be felt on the pharma industry as well.

To begin with, as different indirect taxes will be subsumed in a single tax, it will simplify the taxation system. Going further, the GST will affect the pricing, working capital, contracts with vendors, the ERP systems and internal processes in the sector.

To understand the GST impact on pharma companies, we need to be aware of the entire range of the pharmaceutical supply chain. At one end are pharma product manufacturers, contract and API manufacturers and the organisations that market the products in different parts of India. At the other end is a chain of Carrying and Forwarding Agents (C&F), distributors/wholesalers and retailers.

Two key parameters have changed in the pharma industry on account of GST. One is the manufacturing price, because many raw materials for medicines have been shifted from the 5% VAT bracket to the 12% GST bracket. Secondly, many medicinal salts and compounds have been wholly moved from 5% VAT to 12% GST rate on pharma industry. Furthermore, a number of health supplements that were earlier in the 12.5% to 15% tax bracket are now in the 18% to 28% GST bracket. The net effect of all these changes will be a significant hike in the price of medicines.

For a deeper view of the GST impact on pharma industry, we also need to consider the margins at which the complete supply chain works. In this sector, the clearing and forwarding agent has a 4% to 6% margin on the maximum retail price (MRP) of medicines, the distributor works at 7% to 8% margin on the same and the retailer has a margin of 20% on a medicine’s MRP. With the imposition of GST, the pharma companies will need to pay extra for the manufacturing cost, because the cost of raw materials has increased. Eventually, the product’s MRP will be revised to absorb the total effect.

Meanwhile, the government has also taken some steps to control and cap the price of some critical medicines, salts & compounds. This will result in a loss of 2% to 3% for the pharmaceutical manufacturing and marketing companies, who now have to bear higher costs.

From the viewpoint of wholesalers and retailers, the earning margins may not drop immediately, and supplies will be stabilised soon. The bigger concern will be the inventory held by them, on which the new GST rates will apply, although these goods were bought at the older VAT rates. In this case, the distributors and retailers will lose about 3% to 4% on their entire inventory.

Will the GST impact on healthcare industry also influence medical tourism?

By October 2015, the medical tourism sector of India was estimated to have a value of US $3 billion. It was projected to grow to $7-$8 billion by 2020. A number of studies have shown that the cost of healthcare services in India combined with the travelling and accommodation costs is around 30% to 40% lesser than similar medical procedures in first world countries such as the US, Canada, Australia and most Western European countries. The boom in India’s medical tourism has helped to generate more returns for the healthcare industry.

The overall impact of GST on healthcare and medical tourism industry will be a mix of positives and negatives. The diagnostic services have not been burdened by the tax. There is also no tax on medical devices like hearing aids. However, a 5% GST rate has been applied on vaccines, cardiac stents, diagnostic test kits and dialysis equipment. The rate of GST for X-ray tubes, radiotherapy apparatus and surgical instruments will be 12% and for high-end medical equipment, an 18% tax rate will be applied. While patients located in India may end up paying a higher cost for some products and services, the medical tourism industry is expected to grow, as the comparative costs in a few other countries still give an advantage to India.

Yoga, meditation centres and organic living practices in India also attract tourists from other parts of the world. The country is a home to a myriad of alternative practices like Homeopathy, Ayurveda, Siddha and Acupuncture, which are popular among medical tourists. These give an edge to India over Asian countries like UAE, Oman, Singapore, Malaysia and Thailand. However, the GST rate on Ayurvedic products has been raised to 12%. It attracted a levy of only about 5% in the pre-GST regime. This may impact the price of natural medicine products if the manufacturers decide to pass on the burden to customers. Visits to yoga classes will also be expensive, as it is yet another segment that has become taxable under GST.

Overall, the GST impact on healthcare and pharma industry is not fully established. The obvious benefit will be by way of reduced complexities and the consolidation of multiple taxes into a single rate. The negative impacts will be felt in the form of increased prices for customers and reduced margins for businesses in the supply chain. The GST Council is still deliberating over some reforms to alleviate the burden on the people affected.

Capital Float has been taking note of the changing conditions post the implementation of Goods and Services Tax on 01 July 2017. With the aim of promoting entrepreneurship in India, we maintain our convenient lending services to businesses in all the industries including the pharmaceutical and healthcare sector. We support the Make in India initiative and only happy to answer any query that you may have on the finance product that suits your business, loan interest rates and terms.