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* Key issues impacting the Pharmaceutical Sector
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IN-FOCUS
PACING TOWARDS A DATA PROTECTION LAW: ANALYSING THE DIGITAL PERSONAL DATA
PROTECTION BILL, 2023
04 August 2023
CIRCUMVENTION OF TRADE REMEDY MEASURES – A CRITICAL ANALYSIS OF INDIAN
PROVISION
02 August 2023
LATEST NEWS
PATENTS ACT, AND NOT COMPETITION ACT, TO GOVERN CONDITIONS IN AGREEMENT OF
LICENSING OR ABUSE OF STATUS AS PATENTEE
17 July 2023
50TH MEETING OF GST COUNCIL – HIGHLIGHTS
11 July 2023
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04 July 2023
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19 July 2023
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25 August 2023
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KEY ISSUES IMPACTING THE PHARMACEUTICAL SECTOR – QUANDARIES FOR THE INDUSTRY
09 August 2023
by Preeti Goyal Harshdeep Singh Khurana
The pharmaceutical sector in India plays a seminal position in the domestic and
international economy. It provides more than 50 per cent of global demand for
several vaccines, 40 percent of generic demand in the US and 25 percent of all
medicines in UK. The value of this sector has been estimated at $42 billion in
2021, and it is expected to reach $65 billion by 2024[1].
India saw a monumental alteration in its tax regime on July 1, 2017, when the
government implemented GST that effectively replaced a range of taxes including
excise duty, service tax, sales tax etc. The implementation of GST has resulted
in mixed reactions from the pharmaceutical sector on whether the reform has
brought about positive changes in the economy. In addition to issues arising
under GST, some challenges are being faced by the pharmaceutical sector from
Income Tax perspective which have interplay with GST as well.
In this article, we will delve into the key issues which are relevant for the
Indian pharmaceutical industry from a marketing and supply chain perspective.
Issues to ponder
Historically one common issue for the pharmaceutical industry in India has been
the deduction claimed on various sales promotion expenses and their legitimacy
as business expense. With the advent of GST & implementation of Section 194R
under the Income Tax Act, the classification of these expenses for taxation
purpose have become over complicated. Though a number of Circulars have been
issued by CBDT & CBIC to address these issues in the past, a few of the issues
impacting the pharmaceutical industry which remain unresolved till date, are
briefly touched upon.
1. Credit notes issued in respect of promotion schemes
There are a number of promotional schemes run by the pharmaceutical sector with
an objective to boost their sales. It includes temporary price reductions,
volume discounts, cash discount, target linked payouts, other incentives for the
distributors or retailers, which are offered post sale.
The CBIC vide Circular No. 92/11/2019-GST dated 07.03.2019, has clarified that
secondary discounts which are not known at the time of supply shall not be
excluded while determining the value of supply as the conditions laid down in
clause (b) of sub-section (3) of section 15 of the CGST Act are not satisfied.
In such cases, financial / commercial credit note(s) can be issued by the
supplier as a commercial transaction between the two contracting parties.
Even though it has been clarified that commercial credit notes can be issued for
payouts for which deduction cannot be claimed under Sec 15 of CGST Act, there
may yet arise the following disputes,
* Whether such payouts qualify as a discount or a service consideration for the
supply of marketing promotion service from distributors /retailers?
* Whether such payouts can be considered as third-party consideration, where
such payouts are given in respect of price reduction offered by the
distributors for further sales made by them to retailers or any target-based
incentive offered by distributor to retailers?
* Whether distributor can avail full credit on the GST charged on initial
supply, when a portion of consideration is not paid due to issuance of
commercial credit note by the supplier?
2. Implications on post sales discounts under Section 194R of Income Tax
The CBDT vide Circular Number 12 of 2022 dated 16.06.2022 has clarified that no
tax is required to be deducted under Section 194R on sales discount, cash
discount and rebates allowed to customers. Thus, a discount passed on by a
seller to a customer in respect of a sale, irrespective of the form, will not be
treated as a benefit or perquisite for the purpose of tax deduction under
Section 194R.
While the said clarification seems to take care of situations where the
discounts are given by a manufacturer to distributors, no explicit clarity has
been provided for cases where any payment is made by the manufacturer directly
to the retailer or stockist. There is confusion in the industry if such payment
can be said to be discount in the absence of buyer and seller relationship, even
though it leads to reduction in price offered by retailer to the ultimate
customers. Further, the Circular does not discuss the treatment of sales-target
linked discounts which are given to distributors with an obligation to pass on
such a discount to the retailers. In such cases, a question which comes up for
consideration is whether such payment is in the nature of a discount offered to
the distributor or an incentive given to the retailer on achievement of purchase
target.
Therefore, the manufacturers are continuously struggling with classification of
the various payouts as discount or sales incentive, with no clarity even after a
year of implementation of Sec 194R.
3. Expired goods and product recalls
The CBIC has clarified the procedure in respect of return of time expired drugs
or medicines vide Circular No. 72/46/2018- GST dated 26.10.2018. While two
options have been given for returning such goods i.e., return as fresh supply or
via a credit note, the circular has raised disputes with regards to reversal of
credit, where a commercial credit note is issued by the supplier for the expired
goods which are ultimately destroyed.
In such a case, the Circular contemplates reversal of ITC by the manufacturer on
the inputs & input services used in the manufacture of such goods. However, the
department has failed to appreciate that when a commercial credit note is issued
by the manufacturer, no ITC is availed at the time of return of goods and no
adjustment is claimed towards the GST paid earlier at the time of original
supply. Therefore, one may contend that Section 17(5) does not apply at all, and
reversal of credit only amounts to additional cost for the manufacturer.
The lack of clarification on the above issue has left room for varied
interpretation and opened up a number of investigations by DGGI & Audit
authorities.
4. Point of Sale Material supplied for business promotion
The industry has resorted to varied models for providing point of sale materials
to retailers for the purpose of business promotion. These materials are usually
provided free of cost to the retailers and are consumed at the premises of such
retailers.
In respect of such materials, a common dispute which has arisen for the industry
is regarding the eligibility to avail credit on such material since the same is
provided as free of cost to the retailers and thus, can be considered to be
covered under the purview of ‘gifts’ provided under Section 17(5) of CGST Act.
Even if we keep aside the issue of eligibility to avail ITC, another issue which
arises qua these materials is regarding the exigibility of such free of cost
supply to GST in terms of Entry no. 1 of Schedule I of CGST Act which covers
‘Permanent transfer or disposal of business assets’. In respect of the aforesaid
issues, the CBIC has not issued any explicit clarifications or guidelines and
the same has resulted in dispute on these issues between the industry and the
GST Authorities.
Conclusion
Before concluding, the hard work of the Government and GST Council must be
appreciated. Considering the need of hour, various steps like providing
clarifications / FAQs, helpdesk for technical grievance redressal etc. have been
taken to address the concerns of the industry.
Nonetheless, with a GST crossing period of over half a decade, the Government
should have a relook at the fundamentals of the GST vis-à-vis the present
landscape of GST and the practices being followed in the industry. The above
discussed issues should be on the top of the agenda of the Government and
suitable clarifications should be issued to prevent dispute between the industry
and Tax Authorities.
[The authors are Partner and Principal Associate, respectively, in Indirect Tax
practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] Pharamaceuticals Industry Report, May 2023 – India Brand Equity Foundation
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