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Rajitha Boorugu, Partner
Indirect Tax

18 January 2023

It is expected that the Union Budget 2023-24 would help create the ecosystem to fuel innovation and R&D, built upon manufacturing and research capabilities that will set the pace for propelling the pharmaceutical industry

India, known as the ‘pharmacy of the world’ has been providing the world with affordable quality-assured medicines. The Indian pharmaceutical industry aspires to grow exponentially as per what the Government estimates.

To achieve this vision, it is expected that the Union Budget 2023-24 would help create the ecosystem to fuel innovation and R&D, built upon manufacturing and research capabilities that will set the pace for propelling the pharmaceutical industry. It is expected that the Budget shall outline supportive policies and simplified regulations/norms to improve the ease of doing business in India and aid in the development of the pharmaceutical industry.

Reducing import dependencies: Medical device import in India continues to grow at an alarming pace. India imported medical devices worth INR 63.2bn in 2021-22 which is 41 per cent more than in 2020-21. The Association of Indian Medical Industry has requested the Government in its pre-budget recommendations to end the 80-85 per cent import dependence and protect the manufacturing base in India by increasing basic custom duty on the import of medical devices to at least 10-15 per cent from the current 0-7.5 per cent. It is expected that the Budget would focus on a suitable reduction in customs duty on the import of raw materials to manufacture such devices to encourage domestic manufacturing.

Incentives/grants to build manufacturing and research capabilities: The industry expects the announcement of some incentives and/or grants for cost-intensive research, particularly in critical care segments and exemption from both GST and customs duty on raw materials procured for R&D purposes. Further, it is expected that incentives would be offered to domestic API manufacturers along with a reduction in GST and import duty on APIs.

Input tax credit to healthcare service providers: The industry expects that the Government would consider zero rating of health services, thereby allowing the service providers to claim an input tax credit of the GST paid on inward supplies, which would ensure that the same does not get embedded in the cost of providing healthcare services, thereby resulting in affordable healthcare to the citizens.

Extension in the time limit for claiming EPCG credits: An extension in the time limit for fulfillment of export obligation may be given, considering the COVID-induced lockdown and delays.

Clarification on GST ITC reversal: In view of the regulatory obligations and expiry of products, the pharma industry is required to destroy all expired pharma products. This in turn attracts Section 17(5)(h) of the CGST Act which necessitates the taxpayer to reverse the corresponding Input tax credit claimed with respect to such ‘goods destroyed’. This increases costs in the hands of the pharma companies, while such inevitable consequences are factored in the costing/pricing of products, on which applicable GST is paid.

Similarly, ITC reversal concern exists in the case of free medical samples given to various doctors/hospitals as a part of marketing/promotional initiatives. These free sample distributions, which are factored in the pricing of the products, attract Section 17(5)(h) of the CGST Act which mandates the reversal of the entire ITC availed on such goods. It is expected that the Government will provide the necessary relaxation in the law.

Valuation in refund computation: - The CGST Rules restrict/cap the ‘zero-rated turnover’ up to ‘1.5 times’ of domestic sale value by the same/similarly placed supplier. This has effectively reduced refund eligibility though the intention of the Government may be to curb excess refund claims through over-invoicing. This results in ITC blockage even for genuine exporters who are predominantly into exports with limited domestic transactions.

Non-availability of rebate model for EOUs: EOUs are specifically barred from exercising the rebate model (refund of output tax) and are required to file separate refund applications for claiming a refund of an accumulated input tax credit. These provisions appear to be discriminatory and require revisiting.

Import of services by EOU: EOU units enjoy upfront customs and GST exemption on the import of goods which aids in easing cash flows. However, similar exemptions are not available for the import of services (on which reverse charge liability is discharged by the Indian company) leading to ITC accumulation or the adoption of a refund route. It is expected that upfront exemptions may be given to the import of services as well.

Waiver of GST on inter-branch transfers: The healthcare sector expects a waiver of GST on stock transfers of capital goods and cross charge of the cost incurred by the HO, deeming it as a service supplied between two inter-state branches and the GST charged on such supplies is often not creditable in the hands of the recipient entity, thereby adding to their healthcare cost.

No benefits under the SEIS Scheme: Pharma companies don’t supply goods alone, they also supply services such as drug testing, certifications, etc. for which there are no export benefits such as scrips issued under Service Export Incentive Scheme (SEIS) scrip. The industry expects benefits like SEIS to be made available to pharma companies too.

The Government has been proactively taking various measures to promote India as a manufacturing hub under its flagship ‘Make in India’programme. Special emphasis is given to the Pharma sector to make it self-reliant through incentivising and promoting the production of key raw materials (such as APIs) in India. To make these programmes more impactful, the need of the hour is speedy redressal of existing indirect tax-related issues (few listed above ), which can serve as a major fillip to this sector which represents the country on the global stage as the pharmacy of the world.

Source: Healthcare World