Examining the Influence of GST on India's Healthcare and Pharmaceutical Industries

India holds a significant position as the world's leading producer of generic medicines, with its pharmaceutical sector ranking third globally by volume and fourteenth by value. The growing population fuels an increasing demand for enhanced healthcare services. The nation's healthcare industry has seen rapid expansion, prompting the Health Ministry to focus on developing new technologies for conditions like tuberculosis and cancer. To boost foreign direct investment, the government has also increased the investment limit.

Latest Updates Regarding Pharmaceutical Sector Services

Effective October 1, 2019, the location of service recipients determines the place of supply for exported research and development services in the pharmaceutical sector, under contract, from a taxable territory to a non-taxable territory. These services encompass:

• Integrated discovery and development
• Integrated development
• Evaluation of new chemical/biological entities' efficacy in animal disease models
• Assessment of biological activity of novel chemical/biological entities in in-vitro assays
• Drug metabolism and pharmacokinetics of new chemical entities
• Safety Assessment/Toxicology
• Stability Studies
• Bio-equivalence and Bioavailability Studies
• Clinical trials
• Bio analytical studies

Effects of GST on the Healthcare Industry

The Goods and Services Tax (GST) has garnered widespread attention across all industries in India. It is anticipated to benefit most sectors by simplifying the taxation process, as it consolidates numerous different taxes and duties. The Indian healthcare industry is now a major sector concerning both revenue and employment. As expenditure on healthcare rises, so do tax revenues.

GST integrates various levies of the country's complex tax system into a single, unified structure. GST is expected to have a constructive impact on the healthcare industry, particularly the pharmaceutical sector. It will assist these industries by streamlining the taxation framework, considering that previously, eight different types of taxes were imposed on the pharmaceutical industry.

The consolidation of all taxes into a uniform system will facilitate ease of doing business in India and minimize the cascading effects of multiple taxes applied to a single product. Moreover, GST is projected to enhance operational efficiency by rationalizing the supply chain, which alone could contribute an additional 2 percent to India's pharmaceutical industry. GST will help pharmaceutical companies optimize their supply chains, requiring them to reassess their strategies and distribution networks.

Furthermore, GST implementation will enable a seamless flow of tax credit, improve overall compliance, and create a level playing field for pharmaceutical companies nationwide. A significant advantage for businesses will be the reduction in overall transaction costs due to the withdrawal of Central Sales Tax (CST). GST may also lead to lower manufacturing costs.

Another benefit of GST is the reduction in the overall cost of technology. Previously, technical machinery and equipment imported by the healthcare sector were very expensive. Additionally, the duty levied on these imports was not allowed as a tax credit under previous tax regulations. However, with GST, this situation is likely to change, as duty charged on imported equipment and machinery will be eligible for a tax credit.

Primary Concerns within the Sector

Before GST's introduction, life-saving drugs were exempt from Excise and Customs Duties, although some states applied a 5 percent tax on medicines; GST altered this landscape. A primary concern for the healthcare sector is the inverted duty structure, which negatively affects domestic manufacturers.

In such a structure, the cost of inputs is considerably higher than the output, meaning raw materials incur higher duties than the finished products, thereby discouraging manufacturer investments. To address this, the GST framework includes provisions for an inverted duty structure, allowing for a refund of accrued credit. This represents a significant advantage for the healthcare sector, acting as a catalyst for industry growth.

Potential Impact on Medical Tourism

Regarding medical tourism, India possesses a distinct competitive edge over developed nations. Numerous studies indicate that the total cost of a healthcare package in India, including accommodation and travel, amounts to roughly 30-40 percent of similar medical treatments and procedures in First World countries.

India boasts one of the largest healthcare workforces, producing 50,000 or more doctors and nurses annually. In 2017, the country's medical tourism experienced a boom, generating additional revenue for the healthcare industry. Revenue from medical tourism in India surged from $334 million in 2004 to $2 billion that year.

With GST implementation, medical tourism is projected for substantial growth. The establishment of the National Medical Tourism Board has also initiated policies to resolve issues faced by medical travelers. This Board, operating under the Ministry of Tourism, is expected to greatly assist in coordinating efforts across various ministries to address challenges.

The rollout of GST has led to reduced costs for insurance, pharmaceuticals, and international travel, alongside quality healthcare, which is expected to foster better prospects for medical tourism in India. Valsa Nair Singh, IAS, Principal Secretary for Tourism & Culture with the Government of Maharashtra, highlighted that medical tourism continued to grow despite challenges like demonetization, further aided by the introduction of e-visas on arrival.

Enhanced connectivity has also supported the medical tourism industry. She mentioned ongoing efforts to replicate wellness, yoga, and organic living models. India is a hub for several alternative medicine practices such as Yoga, Ayurveda, Unani, Siddha, Homeopathy, and Acupuncture, which are popular among international visitors. These alternative medicine practices give India a significant advantage over competitors like Thailand, Malaysia, Singapore, UAE, and South Korea. GST is anticipated to positively impact these alternative medicine sectors and contribute significantly to the growth of medical tourism nationwide.

Concluding Thoughts

Industry experts are confident that with GST, both consumers and industry stakeholders will benefit. The healthcare industry is poised to profit from GST implementation, as it will reduce complexities and eliminate various obstacles to business growth. The healthcare sector, including medical tourism, is on a path toward increased profitability and promising development.