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With the government targeting implementation of GST from July 1, 2017, the Indian industry is busy understanding its impact and deciding on how to do business in the changed environment.
Currently, Indian Pharmaceutical industry is plagued by drug & price regulations, complex multi-stage taxation and location based incentives provided by certain states. This has resulted in bringing inefficiency and undue complexity in supply chains in India. But the imminent roll-out of GST provides a silver lining for companies to simplify their operations, and achieve better efficiencies enabling them to serve customers better.
Goods and Service Tax is expecting to have a positive impact on the Indian Pharmaceutical Industries as it will decrease the manufacturing cost unlike the current scene where eight different taxes are levied in the pharma industry which rises up the production cost. On implementation of new tax, the biggest benefit companies can see is reduction in their logistics and distribution costs along with improvement in market responsiveness by reconfiguring their distribution networks. Companies can do away with the current practice of having a warehouse in each state which is designed to reduce the tax burden in the current tax regime and adopt an optimized network with hub and spoke model consisting of larger warehouses, better routes and ideal modal mix to serve their customers better in GST scenario.
Other important benefit will be the mechanism of input credit offset which will be provided in the GST regime. The utilization of credit available in the electronic ledgers of IGST, CGST and SGST towards input credits at each value addition stage will result in avoiding the now prevailing cascading taxation which raises the final prices of goods and services to the consumer.
Beside some positive impact, there are some negative impacts also. As GST is applicable on phases of the supply chain, it will have negative impact on Free-drugs samples, Bonus/Discount Schemes, Inter-state stock transfer, etc. However, Pharmaceutical companies will experience improved operational efficiency, reduced manufacturing & transaction costs as well as improved compliance.