Tax Talk

Spooked by the GST transition, drug retailers shrink stocks to minimise losses

This could lead to a shortage of some medicines for a few weeks.

Drug retailers and distributors have started trimming their medicine inventories to cut their losses during the transition to the new Goods and Services Tax regime, which kicks in on July 1. GST is being introduced to get rid of the current patchwork of indirect taxes and to improve tax compliances, but could lead to a shortage of medicines for a few weeks.

The GST rates for life-saving medicines will be 5% while there was no tax on such medicines under the existing excise and value added tax regime. Drug formulations will be taxed at 12% under GST while the excise and VAT on them amounted to about nine percent of the maximum retail price.

Drug retailers sell their goods at maximum retail prices determined by manufacturers, which is inclusive of excise taxes. During the transition to GST, retailers will have to bear the higher tax liability on their existing stock but will not be able to pass this tax burden on to customers. This will lower retailers’ margins. Although retailers are allowed to claim a refund on the tax, there is uncertainty about the mechanism. Moreover, the GST rules only allow refunds on stocks that are up to six months old. Some drugs have longer shelf lives and retailers are trying to clear or return such products.

“The tax has increased to 12% and in such a scenario, the drug distributor will have to incur some loss as the price at which we sell the drugs to retailer cannot be changed,” said Pramod Ranawat, a drug distributor from Mumbai.

While there will be little impact on prices of medicines for customers, they might find it difficult to find their medicines at pharmacies for a few weeks.

“No one has stopped stocking but definitely every distributor is trying to stock fewer drugs,” said Ranawat, who anticipates that there will be a shortage from about June 20 that could continue up to the first week of July.

Members of the Indian Drug Manufacturers’ Association agree that supply of medicines could dry up during the move to GST. “Medicines come with an expiry [date] and so retailers and wholesalers are returning their products to the manufacturers as they do not want to bear the loss owing to different tax structures,” said TR Gopalakrishnan, deputy secretary general of the association.

Back to manufacturer

Retailers and wholesalers of medicines are not only ordering fewer of drugs, some are also returning existing stock to manufacturers.

Dilip Mehta, the head of the Pharmaceutical Wholesalers Association in Mumbai said that there is a lot of ambiguity with respect to returning of goods. Retailers are unsure which companies are ready to compensate them for their losses due to the transition to GST and so do not know which drugs to return to manufacturers. “Companies which don’t compensate wholesalers for the loses, their good will be returned,” he said.

Not just physical medical stores, online pharmacies are also trimming their stocks. Dr Dhaval Shah, co-founder of Pharmeasy said that the company returned drugs worth Rs 3 crore to manufacturers over three days last week. “Only 20% of drugs are fast moving, everything else is not sold so frequently,” he said. “Hence, we have not only returned but slowed down our purchases from manufacturers and we anticipate a drug shortage.

Pharmeasy has sent messages out to its customers asking them to stock up on their medicines for the next few weeks.

On the other hand, drug regulators are asking people not to buy medicines in panic. “People can buy medicines only after showing a prescriptions,” said Omprakash Sadhwani, assistant director of the Food and Drug Administration in Maharashtra. “So, there is less possibility that people can buy more medicines than needed.”

The move to GST poses yet another problem. Manufacturers and distributors now have to bill their products digitally and the products need to carry very specific price labels. Shah anticipates that several stores shifting to digital billing systems may not be able to carry out operations smoothly. “The transition plan is extremely hazy,” he said.

Finding solutions

President of the All India Organisation of Chemists and Druggists Jagannath Shinde is also expecting a drug shortage in pharmacies across the country. “We are in talks with the government and companies to give retailers and wholesalers a tax credit,” said Shinde. “If we get the tax credit, there should not be any shortage of drugs because then the wholesalers as well as retailers will continue to stock drugs and not trim down their inventories.”

Some drug manufacturing companies have agreed to compensating wholesalers and retailers to ensure stability of the supply chain of their products. “We urge trade partners to keep normal inventories during the transition period,” said Kanchana TK, director general of the Organisation of Pharmaceutical Producers of India. “This will ensure no shortages of medicines. Most manufacturers have pro-actively assured the channel partners compensation for any potential losses due to difference in tax structure.”

Mehta from the wholesaler association in Mumbai said that the shortage may not be severe. “You will get the medicine but not in the first shop you step in,” he said.

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