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ACKNOWLEDGEMENT

GST is a major tool for improving ease of doing business in India. It is considered as the

biggest tax reform since Independence, and will subsume excise and service tax, and

various other local levies including VAT and octroi. Hence, it becomes important to have

an impact assessment study wherein the possible implications may be understood in

advance. One thing is pretty evident that if the GST rate is set at around the 17-18%

mark, service producers would face an increased tax burden while manufacturers would

see a fall in line with Government’s push on “Make in India”. At present, the effective

indirect tax rates on goods and services are 22.5%and 15%, respectively and GST rate of

17-18% is expected to benefit the manufacturers.

Talking about healthcare sector, the rate of GST applicable on pharmaceutical formulations

is yet to be finalized, but it is expected that the said goods could be covered the under

lower tax bracket of around 12% GST. It is understood that the impact domestic

pharmaceutical industry will be negative if the overall rate is over 12%, while experts

opine that healthcare services GST should be at 0% rate, with input credit refunds

available. The overall tax impact could also depend on the locations where these

companies manufacture their products, as it is not yet clear whether the tax waivers given

by states such as Himachal Pradesh and Uttarakhand will continue in the GST regime

thereby impacting the costing. There is uncertainty whether the healthcare sector

(Hospital Services, Diagnostic Services) as well as life-saving drugs and medical devices

will continue to be exempt from taxes and levies, once the GST is rolled out. The medical

devices industry is also feeling the jitters, especially the companies that import devices

such as stents and radiology machines, and do not have to pay tax for storing

consignments of imported goods. Such goods may get covered under GST, but there is no

clarity yet on how the tax will be structured.

I am pleased to note that ASSOCHAM in association with TechSci Research has come up

with a study on this very important topic and underlying theme of “GST: Benefits and

Shortcomings on Indian Healthcare Sector” will be help in understanding the impact

assessment of GST in Pharmaceuticals, Healthcare Services, medical devices, and

multitude of related segments. I also appreciate the role of Shri Umang Chaturvedi,

Chairman, ASSOCHAM National Council on Diagnostics & Medical Devices for his

suggestion on coming out with this whitepaper. I sincerely hope that the report will aptly

highlight the issues and provide solutions.

D S Rawat

Secretary General -ASSOCHAM

ACKNOWLEDGEMENT

Introduction of GST bill in India is expected to relieve the cascading effect of the present

indirect tax regime in the country and is anticipated to streamline the multiplicity of state

and national taxes. The main role of bringing GST is to make a unified all India market for

organizations involved in manufacturing, financing and trading of goods and services with

a solitary tax rate. Also, customers would enjoy the biggest advantage in terms of

reduction in the overall tax burden on goods. This would make Indian products competitive

in both domestic as well as international markets. The overall tax on goods and services

is currently estimated at 25% to 30%.

The implementation of GST would be having a great impact on pharmaceutical sector as

compared to the other sectors. The Indian pharmaceutical sector faces many tax related

challenges, such as, central excise duty on manufacture in pharma, customs duties on

imports, service tax on delivery of services and VAT among others. GST is anticipated to

be advantageous for Indian drug manufacturers, as it aims to unify the multiple tax

structure and bring operational efficiency. Many pharma companies which have set up

their manufacturing units in states such as Himachal Pradesh, Jammu and Kashmir,

Sikkim, etc. have been exempted from the excise and VAT taxes offered under

exemptions/incentive schemes from the central and state governments. GST is expected

to have a positive impact on the healthcare sector in India. However, standard GST rate

in excess of 12% would adversely affect the pricing of drugs and medicines, which would

have an inflationary effect in the coming years. Hence, the impact of GST on healthcare

sector would prove to be a boon as well as bane in distinct areas.

I’m pleased to announcement the white paper titled, “GST: Benefits and Shortcomings on

Indian Healthcare Sector” which provides comprehensive description of GST bill. The paper

also covers its salient features, model law and key issues on pharma industry. I truly

believe this would help to understand Its positive & negative impacts on each sector of

Indian Healthcare Industry.

Mr. Karan Chechi

Research Director, TechSci Research

Analytical Contacts

Mr. Rishi Srivastava Research Manager, TechSci Research Mr. Sandeep Kochhar Head- Healthcare & Pharma Division, ASSOCHAM

About TechSci Research

TechSci Research is a research based management consulting firm providing market research and advisory solutions to its customers worldwide, spanning a range of industries. TechSci Research’s core values are value, integrity and insight. Led by a team of dynamic industry experts, TechSci Research provides its customers with high value market research and advisory services that helps them identify new market opportunities, growth engines and innovative ways to capture the market share. As a result, TechSci’s client leads rather than follow market trends. Not bound by legacy, TechSci’s cutting-edge research model leverages its decades of research knowledge and an increased use of technology as engines of innovation to deliver unique research value. Provided as an alternative to traditional market research, TechSci Research reports do not just deliver data and knowledge rather highlights the insights in a more usable and interactive format for its clients.

About ASSOCHAM

ASSOCHAM initiated its endeavour of value creation for Indian industry in 1920. Having in its fold more than 400 Chambers and Trade Associations, and serving more than 4,50,000 members from all over India. It has witnessed upswings as well as upheavals of Indian Economy, and contributed significantly by playing a catalytic role in shaping up the Trade, Commerce and Industrial environment of the country. Today, ASSOCHAM has emerged as the fountainhead of Knowledge for Indian industry, which is all set to redefine the dynamics of growth and development in the technology driven cyber age of ‘Knowledge Based Economy’. ASSOCHAM is working towards creating a conducive environment of India business to compete globally. ASSOCHAM derives its strength from its Promoter Chambers and other Industry/Regional Chambers/Associations spread all over the country.

Disclaimer The contents of this report are based on information generally available to the public from sources believed to be reliable. No representation is made that it is timely, accurate or complete. TechSci Research has taken due care and caution in compilation of data as this has been obtained from various sources including which it considers reliable and first hand. However, TechSci Research does not guarantee the accuracy, adequacy or completeness of any information and it is not responsible for any errors or omissions or for the results obtained from the use of such information and especially states that it has no financial liability whatsoever to the subscribers / users of this report. The information herein, together with all estimates and forecasts, can change without notice. All the figures provided in this document are indicative of relative market size and are strictly for client’s internal consumption. Usage of the same for purpose other than internal will require prior approval of TechSci Research.

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1. Introduction 2

2. Salient Features of GST 4

3. GST and Centre-State Financial Relations 6

4. Impact of GST on Healthcare Sector - Positive or Negative 8

5. The Model GST Law and Key Issues for the Pharma Industry 13

6. Indian Healthcare Sector Demands Exemption from GST 16

7. Conclusion 18

Table of Content

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1 | I n t r o d u c t i o n The Indian Indirect Tax structure is

quite complex in nature with multiple

taxes levied by Central and State

Governments of India. Central

Government levies various taxes,

including Customs duties, Central Excise

duty, Service tax, etc., on the

pharmaceutical sector. Additionally,

the State Governments levy taxes on

goods at the point of sale, such as State

VAT, Entry Tax, Octroi, etc. Introduction

of Goods and Services Tax (GST) bill in India is expected to relieve the cascading effect of

the present indirect tax regime in the country and is anticipated to streamline the

multiplicity of state and national taxes, thereby increasing the transparency for foreign

investors involved in the intra-state commerce. The country’s healthcare sector, which is

exempted from service taxes, is forecast to benefit from GST on account of removal of the

inverted duty structure, GST is expected to overrule certain tax exemptions that aid cost

reduction of services for consumers. GST Bill proposes a national Value Added Tax, which

is to be implemented in India from 1st April 2017 and has been passed in Rajya Sabha on

3rd August 2016. It is a complete indirect tax, which would replace all the taxes levied by

Central and State governments on manufacture, sales and consumption of goods and

services across India. GST would be imposed at every stage of sales or purchase of goods

and services across the country, based on the input tax credit method. Under GST, exports

of goods and services would be zero-rated and same taxes, as levied on domestic goods

and services, would be imposed on imports.

With the introduction of GST, the customers would enjoy the biggest advantage in terms

of reduction in the overall tax burden on goods. This would make Indian products

competitive in both domestic as well as international markets. The overall tax on goods

and services is currently estimated at 25% to 30%.

Imposition of GST is expected to reduce the overall tax burden. It would enable free

movement of goods within states and reduce the paper work to a large extent. For some

time, the tax under GST may be zero rated or nominal. It has been assured by Central

"GST is expected to have a positive

impact on the healthcare sector in

India. However, standard GST rate in

excess of 12% would adversely affect

the pricing of drugs and medicines,

which would have an inflationary

effect in the coming years."

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Government that from the date of introduction of GST, any revenue losses incurred by the

states would be compensated by the government for a period of five years. It has been

studied that GST would rapidly spur economic growth; and owing to its transparency, it

would be easier to administer.

Earlier GST was first mooted by then Union Finance Minister Shri P. Chidambaram in his

Budget for 2006-07. Initially, it was proposed to be introduced from 1st April 2010. The

Empowered Committee (EC) of State Finance Ministers was requested to come up with a

structure for the GST.

Various aspects of GST were examined by Joint Working Groups of officials who have the

representatives of States as well as the Centre. Based on the debates and negotiations

between States Government and Centre, First Discussion Paper (FDP) on GST was released

by EC in November, 2009. This paper emphasized on salient features of the proposed GST,

which later formed the basis for discussion between the States and the Centre.

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2 | S a l i e n t F e a t u r e s o f G S T GST would be applicable only on supply of goods and services as compared to the

current concept of tax on sales of goods or on the manufacture of goods or on provision

of services.

It would be a dual GST where Centre and States would be simultaneously imposing

Goods and Services Tax on a common base. The GST which is to be levied by the

States would be called State GST (SGST) and that imposed by the Centre would be

called Central GST (CGST).

An Integrated GST (IGST) would be levied on inter-State supply of goods or services

including stock transfers. In order to maintain the credit chain from being disrupted,

the Centre would be collecting this tax.

Import of goods or services is expected to be considered as inter-state supplies and

therefore, would be subject to IGST along with the applicable customs duties.

CGST, SGST & IGST would be imposed at rates upon which Centre and the States have

mutually agreed under the guidance of Goods & Services Tax Council (GSTC).

Following taxes, as shown in Figure 1, currently imposed and collected by the Centre

would be replaced by GST.

Figure 1: Taxes Currently Levied and Collected by the Centre

Source: TechSci Research

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GST would be applicable for all goods and services except electricity, real estate and

alcohol for human consumption.

GST would be applicable on tobacco and tobacco products. Also, the Centre would

continue to impose Central Excise duty tobacco and tobacco products.

A common threshold exemption would be applicable to both CGST and SGST. There

would be an exemption from GST for the taxpayers with a turnover below it. The small

taxpayers below a certain threshold would be provided with a compounding option.

The compounding scheme and the threshold exemption is anticipated to be optional.

State taxes that would be subsumed within the GST are mentioned in Figure 2.

Figure 2: State Taxes Subsumed Within GST

Under Goods and Services Tax, exports would be zero-rated.

The two streams of input tax credit (ITC) i.e., credit of CGST and credit of SGST cannot

be cross utilised, except in special circumstances for payment of IGST on inter-State

supplies.

ITC of additional taxes would not be permitted under GST.

Source: TechSci Research

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3 | G S T a n d C e n t r e - S t a t e F i n a n c i a l R e l a t i o n s

At present, monetary powers amongst the Centre and the States are clearly distinguished

in the Constitution, with no overlap between the two domains. The power to impose tax

on the manufacture of goods (except alcohol for human consumption, narcotics, etc.) has

been given to the Centre while the States are provided with the powers to impose tax on

the sale of goods. However, in case of inter-State sales, the Centre has power to impose

a Central Sales Tax, but the tax is collected entirely by the States.

Figure 3: Products not covered under GST

Until now, the states are not empowered to impose any tax on the sale or purchase of

goods in course of their export or import into the country, these taxes are collected by

Centre as additional duties of customs, which counterbalances the sales tax, excise duties,

State VAT and others. With the introduction of GST, some amendments are required to be

made in the constitution in order to simultaneously empower the Centre and the States to

levy and collect the GST. To address these issues, the Constitution (115th Amendment)

Bill was introduced in the Lok Sabha on 22nd March, 2011. This Bill lapsed with suspension

of 15th Lok Sabha. Thereafter, on 19th December 2014, the Constitution (122nd

Amendment) Bill was introduced in the 16th Lok Sabha, which stated imposition of GST on

supply of all goods or services except for the listed goods.

Source: TechSci Research

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The Constitution Amendment Bill needs two-third majority in the Parliament and

subsequent approval by at least half of the State Legislatures. On 6th May 2015, the Bill

was passed by the Lok Sabha, which was referred to the Select Committee of Rajya Sabha

on 12th May 2015. On 22nd July, 2015, a report on the Bill was submitted by the Select

Committee.

Recently, 5 committees constituted by the Empowered Committee (EC) of State Finance

Ministers have been appointed to deal with the introduction of GST.

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4 | I m p a c t o f G S T o n H e a l t h c a r e S e c t o r - P o s i t i v e o r N e g a t i v e

The Indian healthcare sector is broadly categorised into pharmaceutical, medical imaging,

medical insurance, telemedicine, biotechnology and hospitals. Out of these,

pharmaceutical industry plays the most prominent role in Indian health care system. These

research-directed pharma companies can affect a country’s economy by developing

innovative therapies that replace conventional and less effective. The largest portion of

funds allocated to healthcare sector continues to be devoted to the advancing

pharmaceutical sector. Thus, the implementation of GST would be having a great impact

on pharmaceutical sector as compared to the other sectors.

The Indian pharmaceutical sector faces challenges with issues of numerous taxes at the

central, state and municipal levels, such as, central excise duty on manufacture, customs

duties on imports, service tax on delivery of services and VAT among others. GST is

anticipated to be advantageous for Indian drug manufacturers as it aims to unify the

multiple tax structure and bring operational efficiency. However, GST would have negative

impact if standard GST rate would be above 12%, which would have an inflationary effect

on pricing of drugs. On the other hand, implementation of GST is expected to increase the

5% tax on drugs and medicines to 12% resulting in an upsurge in the prices, thereby

adversely affecting the pocket of end users. Moreover, GST would impact bonus schemes,

free-drug samples and expired drugs return policies and the pharmaceutical companies

would have to re-work their distribution networks and review their sales strategy.

Therefore, keeping in mind the price sensitivity of Indian customers, the apex body of

healthcare sector has urged the Government of India to exempt the sector from the scope

of GST.

Under specific notifications covered under the central excise law, non-imposition of the

excise duty has been presently benefiting the notified life saving drugs / APIs used in

manufacture of life saving drugs. With the introduction of GST law, the central excise duty

would be subsumed. Consequently, it is significant to ensure that the lifesaving drugs

enjoy tax free status under Goods and Services Tax. This would enable exemption of life

saving drugs from IGST on their import. Also, medical devices which are now exempted

from CVD/SAD on import.

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From the pharma industry’s point of view, the key decision to watch out for would be GST

rate on formulations compared to GST rate on Active Pharmaceutical Ingredients (API).

There are chances of accumulation of GST credit even in GST regime in case if the current

deviation in the central excise duty rate of pharma formulations in relation to the duty rate

of API is not addressed. The pharma industry is expecting a favourable solution to this

area of concern.

Under the present Indian indirect tax law, supplies that are made to a loan licensee are

not subjected to VAT, thus making loan licensee operations a broadly recognised prevalent

model. The manufacturing activity is subject to central excise duty which is based on MRP

minus abatement in case if pharma formulations are cleared to the loan licensee by the

job worker. Under the GST regime, clarity on the tax treatment for such supplies to and

from loan licensee should be ensured as it would be in the interest of the pharma industry.

Also, it shall be ensured that under GST additional tax on job work related transactions is

not imposed. As per the present model on loan licensee operations, no service tax is levied

on the processing charges paid to the loan licensee. Since this concept is not applicable as

of now, so the imposition of GST on such processing services need to be specifically zero

rated.

Many pharma companies which have set up their manufacturing units in states such as

Himachal Pradesh, Jammu and Kashmir, Sikkim, etc. have been exempted from the excise

and VAT taxes offered under exemptions/incentive schemes from the central and state

governments. Such schemes are executed either by way of refund of taxes paid or by way

of upfront exemption. The GST council would either recommend the continuation of

existing benefits in tax beneficial zones, state level incentives, etc., or would cease them.

It would be crucial for the pharma industry to study the benefit of continuing already

existing exemptions under GST and the impact of discontinuing the benefits on their

business planning.

GST would be a business transformation triggered by tax. Thus, the transition to GST

regime would require indirect tax team along with intensive participation of a cross

functional team of the companies from supply chain, accounts, IT, HR etc. The effect of

IGST on stock exchanges could open up the requirement for pharma organizations to look

at the necessity to upgrade supply chain network – to concentrate on the ideal number of

distribution centers, locations and linkages. In light of the proposed changes, there would

be requirement to re-evaluate the inventory management norms currently followed by the

companies. It might be exciting to revisit advantages of in-house manufacturing versus

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outsourcing by using contract manufacturing model. Competitive advantages in terms of

pricing of goods and overall strategy of the companies could be attained by the efficient

planning on transition to GST. Change in chart of accounts, study transitional impact and

impact on financial ratios and working capital of the companies, requirement to modify

SOPs could be involved under key accounting impact due to the proposed GST law. Impact

from an IT systems view point would also be a critical aspect. In order to facilitate

transition to GST, a need to bring change in the organisation structure mapping in IT

systems would be required. Also, mapping of various tax registration numbers which

includes changes to customer master and vendors, for instance, tax registration details

would be necessary part of GST execution exercise. In order to carry out smooth

purchasing and sales transactions of the companies, there would be requirement of

modifications to chart of accounts and tax determination rules, tax masters, etc.

Creating awareness with key stakeholders such as suppliers, distributors and internal

stakeholders would be of great importance so that they are kept educated about the plan

and advancement on the GST execution initiative of the organization. Implementation of

GST in a timely manner is necessary since any delay in its execution could have potential

reputational, business and compliance risk.

The present indirect tax system in India is a multistage taxation, which impose taxes not

only at the central level but also at the state level. Central excise is imposed on

manufacture, Customs duty on imports, service tax on provision of services and central

sales tax (CST)/ value-added tax (VAT) at the time of sale. Other taxes which include

entry tax, octroi and cess are also levied by the local and municipal authorities. It is not

possible to credit CST against VAT, service tax against CST/VAT. Owing to this, significant

increase in cost of taxes has been registered as the taxpayer has to file several returns

every month with distinct authorities.

With a perspective to improve this tax regime, the legislature chose to bring about a

comprehensive tax system which would diminish the burden on taxpayer. The Goods and

Services Tax (GST) is a solitary, broad-based thorough tax system which demands tax on

manufacture, sale and consumption of goods and services at the national level. The tax

has to be paid by the service provider claiming input credit for the tax paid by him while

procuring the service. This way the credit variances which are present under the current

indirect tax law would be removed and it would have a favourable impact on pricing of

goods and services. GST is not any additional tax, rather it would subsume excise duty,

service tax, value-added taxes and additional duties of customs and CST at the central

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level, luxury tax, lottery taxes, entertainment tax, octroi, state surcharges related to

supply of goods and services, electricity duty and purchase tax at the State level.

The Indian pharma industry, with an estimated turnover at USD36.7 billion in 2015, is

amongst the largest producers of pharma products in the world. Due to economies of

scale, the pharma industry also enjoys low cost of production in India. But the imposition

of multiple taxes, litigation cost associated with the current tax setup and loss of credit of

tax paid tend to raise product prices.

Discontinuance of CST would be the most obvious impact that appears to be proposed

with the introduction of GST. It is a cost to pharmaceutical manufacturers whenever they

obtain raw materials from outside their state and if sale is on inter-state basis. This is due

to the fact that CST paid in purchases is not creditable against VAT liability of

manufacturer. Another impact that GST poses on pharma industry would be their current

warehousing strategies. In a practise to save on the CST by showing evidence for

movement of goods from one warehouse to another, the most common strategy followed

by manufacturers is that they set up warehouses in different states. Since the CST rates

are lower at locations like Pondicherry or Daman than the rates prevalent in other states,

the manufacturer also set up their production warehouses at such locations in order to cut

short on CST. Thus, the execution of GST would allow the manufacturers to set up

warehouses at select strategic locations for distribution of their products without worrying

for the tax planning options to curb cost of operations. This would decrease transportation

cycle time and urge supply chain decisions and provide the way for consolidation of

warehouses which could assist pharma supply chain reach its highest peak. GST is

proposed to be implemented from April 1, 2017. Basically it is the States which need to

acknowledge GST for it to be implemented in the country.

Although, the new tax legislation is supposed to cut down the manufacturing cost, industry

leaders are still unsure about how it would benefit the end consumers. At present, most

of the medicines are available at MRP for consumption by the end users. The main concern

raised is that if the MRP is comprehensive of the tax, how the end consumer is going to

profit by that. It is estimated that in such a case, it would be up to the hospital or the

retailer to decide whether to share their profit margin with their customers or not. A few

blockbuster drugs are nearly losing their patents. The healthcare sector and particularly

pharmaceutical organizations in India, are under immense pressure to enhance their

operational efficiencies in order to exploit off patent opportunities in both the areas of

manufacturing and supply chains. Implementation of GST bill is expected to result in

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traditional cost and distribution model getting replaced by supply chain efficiencies owing

to the inclusion of central tax under GST, and interstate transactions between two dealers

would become tax neutral.

Currently, the pharma manufacturers obtain their raw material either from different states

or import it from other countries. For different states, the manufacturer has to pay CST

on rates taxed by individual states and for other countries he has to pay import duty. Once

GST is introduced, manufacturing cost of Indian pharma industry would be reduced. This

would have a cascading impact giving incredible chance to upgrade supply chain and

distribution methodology.

Other than positive results, GST has some negative effects which includes impact of GST

on bonus schemes, Reverse Logistics system, and free drug samples. Also pharma

companies need to rework on incentives. Currently, a tax of around 5% is imposed on

medicines in some states, however, implementation of GST would result in increase in the

taxation to 12%, which thereby would lead to higher price for end customers.

Also, some APIs (active pharma ingredients) are exempted from excise duty and therefore

it is a need to keep them tax free under GST, so that the companies would maintain their

prices at optimal levels. GST would have an impact on the contracts with vendors and

customers, pricing, ERP systems, working capital, internal control and accounting. GST

would impact every aspect of the business of pharma companies.

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5 | T h e M o d e l G S T L a w a n d K e y I s s u e s f o r t h e P h a r m a I n d u s t r y

Refund in case of Inverted Tax Structure: Indian pharma industry wants the

issue of inverted tax structure to be completely addressed in GST. The industry is

still awaiting the release of final GST rates. Against the backdrop of Model GST Law,

a refund of the accumulated credit in case of an inverted tax structure has been

ensured. However, it would be better if the GST regime does not ensure refunding

scheme for the inverted tax structure.

Input Tax Credit: It has been proposed that even if GST would come in action,

Input Tax Credit will be allowed only of those goods which fall under specified

Chapters of the Model GST Law, thereby stating that restrictions on Input Tax

Credit will continue.

Area based Exemptions under State Industrial Policy and the Excise

Legislation: It has been stated under the First Discussion Paper on GST that the

incentives under the State Industrial Policies and area-based exemptions under the

Excise legislation should be converted to a tax refund mechanism. However, no

such exemption or incentives has been provided under the Model GST Law. Further,

the prediction by valuation provisions to include subsidies in the transaction value

would significantly impact benefits available to the pharma industry.

Transition Provisions for Imported Goods: It has been stated under transition

provisions that the credit balances which were allowed under the current regime

would be conveyed forward under GST. Now, talking about the stocks of imported

finished goods, Countervailing Duty is not permissible under the current regime.

Also, Excise Duty credit is not admissible in case of goods procured from contract

manufacturers. Therefore, such stocks would undergo double taxation under the

GST regime on these provisions.

Taxability of Free Supplies: Supply of goods between people without

consideration is considered to be a ‘supply’. Consequently, stock transfer of free

drug samples would be subject to GST. Subsequent supply of these free drug

samples to end customers is also anticipated to attract GST. The valuation of these

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free drug samples/ such materials would be done as per the GST Valuation Rules.

Free drug sample supplies are not subjected to VAT under the current regime.

Hence, with the introduction of GST regime the promotion expenses of pharma

companies would increase, which is a negative impact of GST on the pharma sector.

Place of Supply of Services: Pharma organizations constantly get services which

are either provided from multiple distinct locations or are received at multiple

locations. Sometimes situations might occur where it is impossible to determine

the location of receipt of a service, for instance, in case of broadcasting,

advertising, etc. In such cases it is difficult to identify if the supply of services is

inter-state or intra-state, as it is difficult to determine location of receipt. Thus, this

needs to be clarified as it is a critical point regarding availment and utilisation of

Input Tax Credit by the pharma companies.

Input Service Distributor: The Model GST Law offers for the distribution of IGST/

CGST/ SGST as a welcome measure. Since utilisation of SGST of one state against

SGST of another state is not contemplated under GST framework. Thus, there is a

need for clarification on distribution of SGST as IGST.

Point of Taxation: The date on which the recipient shows receipt in books of

accounts is included under point of taxation for supply of goods or services, among

other criteria. On an ongoing basis, it would be a cumbersome process to track this

date. Further, among other criteria, the Model GST law offers for reverse charge,

wherein the date of receipt of goods or services or the date of receipt of invoice as

the point of taxation needs to be tracked. Thus, there is a requirement to restrict

the point of taxation to date of invoice or date of payment.

Power to Challenge Transaction Value: As per the Model GST Law, the

authorities have the right to determine transaction value as per the GST Valuation

Rules if the accuracy of the transaction value declared by the supplier is doubted.

Such a liberated power to suspect the transaction value can lead to trial.

Waybills and Check-post Related Compliances: With the introduction of GST

in India, it is not sure whether the current system of waybills and check-posts

would continue or not. Under the Model GST Law, the Government has been

granted with the power to prescribe documents for INR50,000.

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In the light of these prerequisites, it is critical that the Pharma Industry would get

the chance to enjoy removal of waybills and check-posts related compliances. This

would result in lowering operational costs, optimisation of delivery schedules and

subsequently enabling competitive pricing.

The healthcare sector needs to strategize business operations considering the

transition to GST. Also GST transition is not merely a transition of tax, rather it

impacts almost every aspect of business operation, and therefore there is

requirement to follow ‘whole of business’ methodology in order to ensure an

efficient transition.

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6 | I n d i a n H e a l t h c a r e S e c t o r D e m a n d s E x e m p t i o n f r o m G S T

Healthcare sector of India has urged the Government to provide exemption to the

healthcare services from Goods and Services Tax (GST).

Figure 4: Features of ‘The Levy of GST’

It appealed to increase tax exemption on preventive health check-up and setting up of

healthcare infrastructure medical innovation funds. It has been stated by Healthcare

Federation of India in its pre-budget recommendations that the goal of universal

healthcare coverage would be achieved soon if healthcare sector is exempted from GST.

Once the GST is implemented, it would put distinct sectors under influence of service tax.

Currently healthcare is exempted from service tax and it is anticipated that after the

implementation of GST regime, this exemption should continue at least for a period of

minimum ten years. Therefore, after assessing the status of healthcare coverage across

the country, cost and performance on significant healthcare metrics, a decision to impose

service tax on healthcare sector should be considered.

If the service tax would be levied on healthcare services and facilities, the agenda to

provide universal healthcare coverage would be pushed back. With the current market

The Imposition

of GST

Power to make laws on taxation

of goods & services would be

given to both States houses and

Partliament

Under GST, the State law would

not be overridden by

the Parliament's Law

Exclusive power to impose and

collect GST in case of interstate

would be given to entre, known as Integrated GST

Sharing of IGST between Centre

and States would be prescribed by the Central Law based on views of GST council

Source: TechSci Research

17 | P a g e

trends, there is need to focus on preventive healthcare sector. It has been appealed by

the Government to raise the tax exemption on preventive health check-up under section

80-D of the Income Tax Act, 1961 from current value of INR5,000-20,000 in order to

achieve the aim of universal healthcare coverage.

Additionally, along with the urge to exempt preventive healthcare sector from service tax,

it has been recommended to the Government by the healthcare bodies that GST should

not be imposed on health insurance premium. Since healthcare is exempted from the

service tax as of now, so based on the similar principle, healthcare financing should also

be exempted from the service tax. The president of Healthcare Federation of India stated

that they have appealed the Government to rise the depreciation rate applicable on

medical devices, medical equipments and pathological equipment from 15% to 30%.

Also, the need of healthcare facilities in tier 2, 3 and 4 cities could be met by revising the

corporate income tax incentives, which is currently given on capital expenditure for

hospitals having 100 beds and above. This corporate income tax incentive needs to be

amended for Greenfield hospitals with 50 beds, thereby encouraging the healthcare

facilities in tier 2, 3 and 4 cities. In addition, medical innovation fund and healthcare

innovation fund should also be setup by the government in order to encourage new

business models and entrepreneurship in healthcare sector.

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7 | C O N C L U S I O N

Goods and Services Tax (GST) has been in news bulletin since 2000 and has undergone

numerous phases of deliberations, debates and criticisms both inside and outside the

Parliament. On 14th June 2016, the Empowered Committee of State Finance Ministers

sanctioned the Model GST Bill, thereby reaching an important milestone in its prolonged

and winding journey. On the same day, the draft document for Model GST Law for public

debate was released by the Ministry of Finance. All the indirect taxes levied by the Central

and State Governments for instance, central excise duties, service tax, custom duties,

additional excise duties; state taxes such as VAT or sales tax, entry tax, purchase tax,

central sales tax, luxury tax, entertainment tax, etc. would be replaced by GST.

Taking into consideration the fact that India is a federal nation, dual GST would be provided

by the Model GST Law, wherein, central and state GST would be simultaneously imposed

by both the centre and states, respectively. It is anticipated that central GST and state

GST would share the common base and other essential design features under the GST

regime. The main role of bringing GST is to make a unified all India market for

organizations involved in manufacturing, financing and trading of goods and services with

a solitary tax rate. It aims at providing contented business environment to foreign

companies which need to acquire tremendous compliance costs due to the multiplicity of

taxes, wide varieties in duty rates, extent of exemptions, etc. GST is collected on value

added goods and services at each stage of sale or purchase in the supply chain. GST paid

on the acquisition of goods and services can be introduced against that payable on the

supply of goods or services. The manufacturer will pay the applicable GST rate, but until

the final stage of sale is reached he would claim it back through the tax credit mechanism.

As far as the states are concerned, foremost burden for states is the loss of revenues,

which is anticipated to arise due to two factors. Firstly, the manufacturing states are more

concerned as compared to others because value added tax is an origin-based tax in the

current tax regime, while GST is a destination-based tax. In the origin-based tax system,

the tax is collected from the place where supplier of pharma product is located, however,

in the destination based system, tax is collected from the place where consumer of the

particular product is located. Thus, more industrialized states including Tamil Nadu,

Maharashtra and Gujarat are afraid of losses of revenues on movement of goods made in

their respective states. Second, loss of revenue may emerge from GST replacing the plenty

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of state duties as they exist today. Assurance from the Central Government has been given

for Compensation of the losses suffered in the first five years. 100% compensation for

losses suffered in the first three years for the states has been assured, which would

become 75% in the fourth year and 50% in the fifth year. However, it is expected by the

finance ministry that all states would not require compensation for five years as consuming

states in general would register increase in their revenue with the implementation of GST.

The impact of GST on healthcare sector would prove to be a boon as well as bane in distinct

areas. Assocham considers the Goods and Services Tax Bill as "Brahmastra" for the nation

as it would provide a simple platform to move goods within states, administered by simple

taxation system. The current taxation system is more favourable for the movement of

goods outside the country. Thus, there is a need for the simple taxation system which

would benefit movement of goods within the states, which is expected to have a positive

impact on ‘Make in India’ initiative. GST would benefit the major segments of healthcare

sector such as pharma industries, health insurance premium, hospitals, medical equipment

and others by subsuming various taxes levied by states into one common tax i.e. GST.

Under GST, the cascading effect of tax on goods and services would be reduced. Thus,

making Indian healthcare market a seamless uniform market, demolishing fiscal barriers

between the states. The inverted duty structure which is adversely affecting the domestic

manufacturers would be reduced by GST, thereby resulting in reducing the cost of inputs,

thus boosting the investments in healthcare sector. However, certain tax exemptions that

reduce cost of services for customers might be overridden with introduction of GST. This

would pose a negative impact on healthcare sector from consumer’s point of view.

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Notes

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