As the GST sets in, pharmaceutical companies have to pay more in manufacturing cost as raw material cost has goes up by 7% and hence the MRP of the product need to be changed to absorb that impact.
2016-17 has been tenure of prolific significance, as India saw a plethora of reforms, set to change how the market functions. Amongst the lot, GST is the single biggest tax reform which all industries are witnessing today. Yet, there is a great deal of ambiguity surrounding it as its impact on various industries like pharmaceutical industry is unknown today, creating a lot of uncertainty in the whole supply chain. To comprehend the impact of GST, we need to get grips on the intricate spectrum of pharmaceutical supply chain. On one end is pharmaceutical product manufacturers, contract and API manufacturers and the marketing companies which market product across the country while on the other hand are Carrying and Forwarding Agents(C&F), distributors/wholesalers and retailers.
There are two key things that have changed are the manufacturing price- many raw materials for API and products have moved from 5% VAT bracket to 12% GST bracket and a lot of medicine salts/compounds have moved from 5% to 12% GST bracket. Also there are a lot of food and medicine supplements which have moved from 12.5%-15% to 18 and 28% brackets, marking a record hike in price. For this, we need to understand the margins at which the supply chain operates. The C&F agent operates at 4-6% margin on MRP, distributor wholesaler operates at 7-8% margin on MRP and retailers at 20% margin on medicines.
As the GST sets in, pharmaceutical companies have to pay more in manufacturing cost as raw material cost has goes up by 7% and hence the MRP of the product need to be changed to absorb that impact. While speaking about the overall impact of GST to end consumer, as manufacturing cost is between 10-15% of product MRP, the GST impact to the end consumer is less than 1% by cutting C&F cost, yet paying higher GST on finished product, the total net impact resulting to almost 4% to the end consumer. Thus in the coming days we can expect MRP on medicines revised by 5%, as pharmaceutical companies decide to pass the complete burden to the end consumer. Government has taken steps in ensuring drug price controlled medicines and also capping MRPs of certain salts/compounds, resulting in a loss of 2-3% by pharmaceutical manufacturers and marketing companies losing.
From a perspective of wholesalers and retailers, margins are not going to drop on an immediate basis and stability in supplies is to be seen soon. The bigger issue lies in the inventory they are holding on which new GST norms will apply goods were previously purchased on respective VAT rates. Here distributors and retailers are set to lose overall 3-4% on total inventory.
To sum it up, pharmaceutical industry in India is over USD 100 billion and at any point of time 15-18% hold in the inventory section. So, even a 3-4% loss in overall value chain on 15 billion dollars accumulates to USD 600 million losses for the industry, a lump sum amount. With time, we will see the fullest impact of GST and take steps accordingly.