GST may benefit pharma MSMEs

According to industry insiders, the upcoming goods and services tax (GST) can spell major benefits for micro, small and medium (MSME) units in Gujarat’s pharmaceutical industry, with as much as a 25 per cent increase in business likely.

K S Chhabra, managing director of Vadodara-based Hindustan Biosynth Ltd, and honorary secretary of the Indian Drug Manufacturers Association (IDMA), Gujarat chapter, pointed out, “Once GST is introduced, the excise duty is likely to be subsumed in Central GST, which may not necessarily be at the same rate as the prevailing excise duty rate. Now, pharma majors who get contract manufacturing done from MSMEs in the excise-free havens in the hill states can return to Gujarat, which houses the largest number of pharma SMEs in the country. Doing business in tax havens may not remain as lucrative in the GST regime.”

In addition, SMEs would also be able to avail themselves of the entire input credit for taxes paid on procurement from various sources, such as import, inter-state purchases or even local purchases. “This would enable SMEs to price their products more competitively,” a senior IDMA official explained.

Kamlesh Patel, CEO, pharma operations, at West Coast Pharmaceuticals, and the immediate past president of IDMA-Gujarat Board, said, “Gujarat currently houses around 250-300 MSME formulation manufacturing units with a net turnover of over Rs 300 crore. These units had lost around 50 per cent of their business to states with tax holidays, but with the upcoming GST regime, at least 25 per cent of business is likely to return to these formulation manufacturing units.”

Almost all the major pharma players in the country – including Piramal, Cadila, Alembic, Sun Pharma and Ranbaxy, among others – get contract manufacturing done for formulations, active pharmaceutical ingredients (API) and pharmaceutical intermediates from SMEs in Gujarat.

The GST, however, is unlikely to yield immediate benefits to pharma machinery manufacturing and packaging SMEs in the state, industry insiders felt.

Also, under the existing value added tax (VAT) regime, SMEs find it difficult to reach out to potential customers outside their home state, as the Central sales tax on inter-state sales increases the purchase cost to the potential buyer. This, too, is likely to change under the GST regime, and SMEs can now look at tapping clients across India, said a senior IDMA official.

Gujarat used to enjoy a 42 per cent share in the net pharma production in India around five years back, but its position in the pharma sector dwindled when Baddi in the Solan district of Himachal Pradesh emerged as a major investment destination due to a number of tax holidays that were being offered.