Giri Giridhar, Senior Director Finance, MSD Pharmaceuticals Pvt Ltd, talks about the impact of the GST Bill on the pharmaceutical sector. By Satyaki Sarkar
During his 30 years in the finance industry, Giri Giridhar has worked in a wide range of verticals, including career consumer businesses, financial services, retail, and now pharma. With GST Bill a looming reality, he talks to us about the affect it’s going to have specifically on the pharmaceutical industry.
“At the moment the pharma industry is considering three areas of impact,” Giri Giridhar. “Firstly, we’re trying to understand the possible impact of the rate change; secondly, the distribution realignments that will be necessitated; and thirdly we’re considering the vast number of IT infrastructure changes that will take place as a result of it.”
Opportunity to reduce inefficiency and costs
“The most significant and exciting impact, however, in my opinion, will be the distribution infrastructure changes. Each Indian state has its own taxation. Currently, the pharma industry has a product storage location in every significant state, and local sales are done accordingly. This shows how disorganised and inefficient the entire distribution infrastructure is right now.
“Additionally, a whole bunch of stockists are invoiced every month by different pharma companies, and there are more than 5,000 stockists in existence. This only goes to show that the entire distribution logistics work is very inefficient today. Post GST, it could be that there is one single warehouse, for each geographical location. However, this might be an extreme case and not necessarily be the solution for pharma. Of course, I am probably oversimplifying it, and in reality there may never be just one single warehouse. But at the very least you will be able to do away with invoicing 2,500 to 5,000 different stockists, and instead appoint seven, eight or event ten distributors around the country, who you can invoice directly, and who in turn will invoice their customers. Therefore, there will be a huge opportunity to simplify operations and reduce overall costs.”
A single tax
“At the moment, there are different taxes are levied on the pharma industry, with the passing of the GST bill they are going to be subsumed and that should prove to be very beneficial. However, what we don’t know at this point is the rate the taxes are going to be modified into, with rumours stating it could be between 12 and 18 per cent. Clearly the industry wants the rates to remain low, as these are lifesaving drugs, and the cost incurred by patients should not increase. I feel that it will in all probability be neutral and will not change much from the present. Once the rates are clearer, we’ll need to calculate how best to adapt and figure out our strategy. The impact will also depend on the kind of pharma company it is, whether involved with retail, manufacturing, import and export, etc.”
Challenges at the point of transition
“The passing of the bill will bring with it a number of transition challenges that are twofold in nature. Companies that are into complex manufacturing will have to wait and see the impact it will have on their stocks, and whether they will be able to get the input credit completely. Additionally, the all-India association of chemists and druggists who oversee the entire pharma ecosystem also holds stocks at the point of transition. So with the current rate of taxes changing we will need to see what they will or will not be able to pass on. It is presumed that a major disruption will take place at the point of transition for a month or so, as the current customers are holding stocks at the duty rate. There might be a few claims that will flow back to the pharma industry.”
Problems with the anti-profiteering clause
“The other point of concern is the anti-profiteering clause, which exists as part of the GST bill. It states that if the impact of the new rates is lower than the current taxes, then you are required to pass on that benefit to patients. We need to observe how that really plays out, as sometimes there are stocks in the market at a certain price, and regulators require companies to pull out those stocks and re-price them according to the new norms. That can have a very negative impact as the cost to recall stock, along with the change in prices ends up being even more than the benefit the consumer can get. So we are hoping that the regulators will take a more practical approach and not make the recall and re-pricing of stock a requirement.”
Impact on vendors
“Companies, especially in the pharma space, are now also regrouping their entire vendor ecosystem. The law basically says that if one is paying tax on a purchase, he will be able to set it off on his sale. The good thing about GST, however, is that it is a self-enforcing system, and this is going to make vendor-producer relationships a lot smoother. Unless my vendor, who has charged me tax, has uploaded the details of the tax collected from me onto the system, I will not be able to get a credit of the taxes paid on my purchases. This is very similar to the Income Tax form 26AS that we are all used to. So if there is any vendor who has collected taxes from a customer but is not complying with the regulations, the responsibility falls on him to make sure all his vendors are compliant.”
“Companies have started to work on modifying the IT systems. SAP, Oracle and the others have started to offer patches to their customers to help them comply with GST.
Overall exciting times!!”