Hyderabad: The goods and services tax (GST), India’s biggest indirect tax reform, is expected to be beneficial for Indian drug makers in the medium to long run as it aims to simplify tax structure and bring operational efficiency. However, concerns about drug prices, exemptions and compliance remain.

“The details such as what rate is applicable to pharma is not known, but we think the government will be conscious of the fact that essential medicines should have minimum taxes," said D.G. Shah, secretary general of Indian Pharmaceutical Alliance, the industry lobby group that represents large domestic Indian drug makers.

Shah welcomed GST saying that it creates a level playing field for pharmaceutical companies and will eventually benefit consumers.

“As far as the health care and pharma industry is concerned, it is expected that the new GST legislation would benefit the consumers by making affordable health care a reality," said Ramesh Swaminathan, chief financial officer and executive director of Lupin Ltd, India’s third largest drug maker.

Swaminathan said his company is waiting for details such as tax rates, exemptions and legislative framework for implementation that needs to be finalized by the GST Council.

“We believe that IT will play a crucial role in its effective execution, therefore it is necessary to have robust infrastructure to ensure seamless compliance and tax administration," Swaminathan said.

Analysts warned that there could be mild inflationary impact of GST on prices of medicines in the short term of one-two years. “Up to 12% tax rate, the impact on pricing of drugs will be neutral. Beyond that, there will be some inflationary effect," said an analyst tracking the sector who didn’t want to be named citing his company’s policy.

“The concern is that the rate of GST should be kept at a competitive level so that there is no increase in prices of drugs and medicines," said Utkarsh Palnitkar, partner and head-pharmaceuticals and life sciences at KPMG in India

GST may also require companies to clean up their supply chain, to save taxes.

“Most likely, there will be a need to move to a hub-and-spoke model with primary and secondary hubs across states which could also necessitate an overhaul in the way companies choose their warehousing network with cities like Chandigarh, Lucknow, Guwahati and Nagpur emerging as primary hubs in addition to the metros," said Palnitkar of KPMG.

Most analysts have pointed out that despite initial issues of tax rate and compliance, in the long run GST will be a win-win situation for both pharmaceutical companies and consumers.

“The simplification of supply chain and improved operating environment will alone add 2% to the size of the pharma market," Sujay Shetty, leader of the pharma and life sciences at PWC India.

Even a 2% reduction in production or distribution cost will add to the profits by over 20%. It could be the single biggest shot in the arm for the pharmaceutical industry and create competitive advantage for those who move early," said Manish Panchal, practice head-chemicals, lifescience and supply chain, and Siddharth Paradkar, principal-logistics and supply chain, at Tata Strategic Management Group in their latest report.

The Indian pharmaceutical industry, with a domestic turnover of over $15 billion, has been witnessing high growth over the past decade. But it is facing problems like cumbersome taxation, heavy competition and increasing price controls.

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