Impact of GST on Accounting/Finance of Pharmaceutical Industry

By Finance Advisory, 3EA
Impact of GST on Accounting/Finance of Pharmaceutical Industry

The generic drugs forms the largest segment of the Indian pharmaceutical sector. About 20 per cent of global generic medicines comes from India which is equivalent to 70% of the market share in terms of revenue. With a rising demand year after year the health care sector is expected to touch $150 billion by the end of 2017 but with the outcome of GST how the pharmaceutical market will behave is a major worry for many Pharmaceutical companies.

Healthcare and pharmaceutical industry is one of the leading contributors with respect to revenue and employment and therefore revenues from taxes. GST has subsumed various taxes to make it simple and cost effective.

Industry and its Supply Chain:

Implementation of GST will result in an efficient supply chain. Inter-state transaction between two dealers will become tax neutral, replacing traditional C&F distribution model. Most of the companies will have to realign their current distribution models by reducing the dependency on multiple states and increasing the focus on regional hubs. This will not only make the process lean and alleviate the complexities involved but will also reduce the SCM cost considerably

Records under GST:

  • Manufacture of goods
  • Inward and outward supply of goods and door services
  • Stock of goods
  • Input tax credit
  • Output tax payable and paid

Changes in Accounting:

Since the GST is a complete overhaul of the existing tax system, all companies are required to have changes in accounting. This can extend well up to keeping track of the different components of GST, separate entities for inter and intra state sales, and even some additional accounts in Chart of Accounts.

  • Re-categorize the goods into the five GST rates (0%, 5%, 12%, 18%, and 28%).
  • Changes in Invoices to accommodate GST requirements like GSTIN, and the place of the consumption.
  • Since inter and intra state sales and purchases are taxed differently, pharma companies need to keep track of them separately. This extends to tax components as well; tracking of the CGST, SGST, and IGST components separately.
  • In addition to this, one is required to update chart of accounts to keep track of all this. The obsolete tax accounts will need to be replaced with new ones based on the type of business, credit availment rules, and place of purchase and sales.

Pharma Wholesalers and Retailers Outside Tax Bracket

Under the current indirect tax regime, wholesalers and retailers usually escape the tax liability as there is no mechanism by which their actual purchase and sale can be traced. Most of their transactions are done in black, meaning no invoice is issued to the buyer, and eventually no entry is posted in the books for such sales. These taxpayers usually leverage the tax liability evaded and undercut the market to gain in volume. Their margin of profit remains as low as 1 percent. Since under the GST regime, every invoice pertaining to taxable supply has to be uploaded on GSTN's common portal and has to be accepted by the buyer, wholesalers and retailers will now be unable to escape their tax liability. The only possibility for tax evasion would arise if the entirethe entire supply chain is outside the tax network and did not file a return under GST law, which is very unlikely.

What Changes will GST bring to the pharmaceutical sector?

GST will definitely change the way one does business in the pharmaceutical sector. Many things will become much simpler than the earlier, while for many the pharmaceutical industry needs to improve its entire process or way. Here are the changes that will occur:

  • The way of paying tax will change entirely by eliminating the 8 types of several taxes. Now the pharma companies only have to pay a single tax to the government.
  • GST will reduce the manufacturing cost which is great for the buyers
  • It will also reduce the cost of technology used in the pharmaceutical sector. The industry importimports many advanced machinery and equipment, with the introduction of GST it will be reduced which is at present very costly.

The financial advisory team at 3EA have been providing in-depth solutions to all its clients in overcoming the difficulties caused due to change in tax system i.e. GST. It calls for thorough research and clear understanding of both the taxation systems to ensure smooth transition. The financially qualified professional of 3EA with notable experience have been working day in and day out to bring stability in the businesses and the process. If you are still stuck in in the web of GST or unable to figure out how is it going to impact your upcoming venture then 3EA is the company you can rely on.

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Article by: Finance Advisory, 3EA