ABC Pharmaceuticals is a leading pharmaceutical company operating in India. Before the implementation of Goods and Services Tax (GST), the pharmaceutical industry faced several challenges due to the complex tax structure prevailing in the country. The sector was subject to a plethora of indirect taxes, such as excise duty, value-added tax (VAT), central sales tax (CST), and various other levies at the state level. These taxes not only increased the cost of production but also created compliance issues and logistic challenges for pharmaceutical companies like ABC Pharmaceuticals.
Challenges Faced Before GST (GST Case Study)
Complex Tax Structure
The fragmented tax system with different tax rates and regulations across states made compliance a complicated process for ABC Pharmaceuticals. The company had to deal with multiple tax authorities, leading to increased paperwork and administrative burden.
Cascading Effect of Taxes
The pre-GST era witnessed a cascading effect of taxes, where taxes were levied on taxes. This led to an increase in the overall tax burden, resulting in higher product prices.
As the pharmaceutical industry operates across different states, CST was levied on the movement of goods from one state to another. This added an additional tax burden, making inter-state transactions costlier.
Input Tax Credit (ITC) Limitations
The non-availability of seamless ITC across different taxes affected the profitability of ABC Pharmaceuticals. The inability to claim ITC on various inputs and services increased the cost of production.
Positive Impact of GST Implementation
The implementation of GST in India on July 1, 2017, brought about significant changes in the tax landscape, particularly for the pharmaceutical industry. ABC Pharmaceuticals witnessed several positive impacts due to the introduction of GST.
Streamlined Supply Chain and Logistics
With the abolition of multiple indirect taxes and the introduction of a unified tax regime, the supply chain of ABC Pharmaceuticals became more efficient and streamlined. Earlier, the company had to maintain warehouses in different states to avoid CST on inter-state transactions. With GST, the need for multiple warehouses reduced, and the company could consolidate its inventory at centralized locations. This resulted in cost savings and improved logistics management.
Reduction in Compliance Burden
The transition to GST led to a reduction in the compliance burden for ABC Pharmaceuticals. Under the pre-GST regime, the company had to comply with various tax regulations in different states, leading to complex paperwork and frequent assessments. With the unified GST system, compliance became more straightforward as the company had to deal with a single set of rules and returns for all its operations across the country.
Elimination of Cascading Taxes and Cost Optimization
GST eliminated the cascading effect of taxes, as it allowed for seamless ITC across goods and services. This helped ABC Pharmaceuticals reduce the overall tax burden and optimize costs. The company could claim ITC on raw materials, packaging materials, and various services used in the manufacturing process, which positively impacted its profit margins.
Practical Example of GST Case Study Implication
Let’s consider a practical example to understand how GST has positively impacted ABC Pharmaceuticals:
Suppose ABC Pharmaceuticals purchased raw materials worth INR 1,00,000, and the tax rate on raw materials was 12% (including excise duty and VAT). So, the tax amount paid on the purchase was INR 12,000.
The company then used these raw materials to manufacture medicines and incurred additional expenses on packaging materials, machinery maintenance services, and other operational costs. These expenses also attracted indirect taxes, adding to the overall tax burden.
When the medicines were sold, ABC Pharmaceuticals had to levy a separate tax on the selling price, which further increased the tax liability.
Under the pre-GST regime, the company could not claim seamless ITC on the taxes paid at each stage of the supply chain. So, the total tax burden on the final product included taxes on raw materials, taxes on various services, and the tax levied on the selling price, resulting in a higher cost of the product.
With the implementation of GST, the tax structure changed significantly. Let’s assume the GST rate applicable to medicines is 18%. Now, under GST, ABC Pharmaceuticals can claim ITC on the GST paid on raw materials, packaging materials, and services used in the manufacturing process.
So, the taxes paid on the purchase of raw materials (INR 12,000) become available as ITC. When the company sells the final product for INR 1,50,000, it will now apply the GST rate of 18% on the selling price, which amounts to INR 27,000.
However, the company can now set off the ITC of INR 12,000 against the GST liability of INR 27,000, resulting in a net tax liability of INR 15,000.
In this example, GST has led to a reduction in the overall tax burden by INR 12,000 for ABC Pharmaceuticals. This cost saving has a direct positive impact on the company’s profitability and competitiveness in the market.
Enhanced Competitiveness and Market Expansion
The simplified tax structure and improved logistics under GST enabled ABC Pharmaceuticals to enhance its competitiveness in the market. The company could offer competitive prices to customers due to the reduction in taxes and cost optimization. As a result, ABC Pharmaceuticals gained a competitive advantage over its counterparts who were operating in states with higher tax rates.
Moreover, the ease of doing business under the unified GST regime allowed the company to explore new markets and expand its presence across the country. Earlier, the complexities of state-specific taxes often deterred companies from venturing into certain regions. With GST, ABC Pharmaceuticals could penetrate new markets and cater to a broader customer base.
Before GST, if ABC Pharmaceuticals wanted to expand its operations to a new state with a higher tax rate than its current location, it would have faced challenges in maintaining profitability. The higher tax rates would have increased the cost of production and, subsequently, the selling price.
However, with GST’s introduction, ABC Pharmaceuticals can operate seamlessly across different states without worrying about state-specific taxes. This has encouraged the company to establish new distribution channels and explore untapped markets, leading to increased market share and revenue growth.
Unification of National Market
GST transformed India into a unified national market, breaking down economic barriers between states. This has been especially advantageous for pharmaceutical companies, as they can now operate with greater flexibility and efficiency. ABC Pharmaceuticals can now source raw materials from any part of the country without worrying about state-specific taxes. This has not only improved procurement options but also reduced transportation costs.
Before GST, if ABC Pharmaceuticals procured raw materials from a different state, it had to pay CST on the movement of goods, which added to the cost. With GST, the company can seamlessly move goods across state borders without any additional tax burden. This has opened up more choices for sourcing raw materials and allowed ABC Pharmaceuticals to select the most cost-effective suppliers.
The implementation of GST has brought about significant positive changes for ABC Pharmaceuticals. The unified tax structure in GST Case Study has streamlined the supply chain, reduced compliance burdens, and eliminated the cascading effect of taxes. These factors have positively impacted the company’s profitability, competitiveness, and market expansion efforts.
Furthermore, GST has unified India’s national market, providing ABC Pharmaceuticals with opportunities for cost optimization and improved sourcing. As the company continues to benefit from the advantages of GST, it remains committed
to leveraging the unified tax regime to further enhance its business operations and contribute to the growth of the pharmaceutical industry in India.
Disclaimer: The gst case study presented here is purely fictional and intended for illustrative purposes only. Any resemblance to actual companies or events is coincidental. The tax calculations provided are for illustrative purposes and may not reflect the actual tax rates prevailing during the time of the case study.