Impact of GST on pharmaceuticals industry

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FY 2016-17 has been very significant for India as we could see a plethora of reforms coming into the system. Amongst all of the reforms, Goods and Service Tax was the one that stole the party and made most of the news. It can be witnessed today across all industries and sectors as to what impact we are having on the market.

There is a lot of ambiguity going forward and a lot buzz surrounding everyone as to what immediate impact it has over us and what lies in the future for everybody as we try and move on after accepting the grand GST.

Though GST has been making a lot of news now and then over a lot of issues, there still lies a cloud of uncertainty that is pondering over a lot of industries. One from such industries is the pharmaceutical industry. The GST has created a lot of uncertainty in the entire supply chain and to comprehend the impact of GST.

One would require having a lot of grip over the very intricate spectrum of the supply chain pertaining specifically to the pharmaceutical industry, said Sameer Bhalla, the founder, and CEO at Healthintel Services.

He mentioned that on one end we have the pharmaceutical product manufacturers, contractors, the API manufacturers and the marketing companies, which market their products pan India, while on the other side of the plate we have Carrying and Forward Agents (C&F), wholesalers, distributors and various retailers. As per Mr. Bhalla, two important things seemed to have changed post the implementation of Goods and Services Tax (GST).

One being the manufacturing price of the raw materials for API that have moved from the 5% bucket previously (VAT) to 12% GST and the second one being on the salts and compounds used to manufacture the medicines that have moved in the similar fashion, i.e. from 5% VAT bucket to 12% GST.

Apart from these even the food and medicine supplements have shifted from a 12.5%-15% to 18-28% bucket since 1st July 2017. This has been considered as a record hike in prices of medicines.

Now the entire story draws down to how the margins are calculated or found; a C&F agent has a margin of 4-6% on the MRP whereas the distributor has a margin of 7-8% on the MRP. Ultimately the retailers keep a margin of nearly 20% on the medicine and its supplements.

Since the GST has been implemented, now the manufacturing companies have to pay more for purchasing the raw materials (the raw material costs have gone up by as much as 7%). Therefore, this rise would have to be passed through the MRP to absorb the impact ultimately. In the coming days, the consumers can expect to see the prices of medicines rising by nearly 5% as it has been decided that the burden of the increase in the cost would be borne by the end consumer and not the companies.

Mr. Bhalla confirmed that the manufacturing cost for preparing a medicine is 15-20% of the MRP. Though the GST impact on the end consumer should be less than 1% if C&F cost is cut down, yet the total net impact would be nearly 4% to the end consumer.

The government has pitched in to ensure that the drug prices do not surge beyond a limit and hence are also capping the MPRs for certain salts and compounds used in the manufacture of various medicines. This step is expected to result in a loss of 2-3% that the pharmaceutical manufacturing companies would have to incur.

From the purview of wholesale and retail players, the supply is expected to be stable, and no drop in margins is expected for them. The biggest issue though would be the inventory they would have as they would have purchased the goods at 5% VAT before GST but would have to pay 18% GST on now on the sales. In these cases, all the distributors and retailers are bound to lose as much as 3-4% on the entire inventory that they have.

The pharmaceutical industry in India is near $100 Billion markets, and the entire industry holds nearly 15-18% as inventory. Hence if the entire value chain incurs a loss of 3-4% that would accumulate to as much as $600 million loss for the entire industry.

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A pure vegetarian, who believes in reincarnation & law of karma and follows the philosophy of “Live and let others Live” because all living beings have equal right on the resources of this planet. Being from a finance background, he loves to write about business aspects of the trends.

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