21st February, 2017: Stock transfer as free Supplies / materials is a practice largely prevailing in the Pharma sector which is not subject to VAT in the current indirect tax structure. As per the estimates of the experts, stock transfer for the promotion accounts about 20-25% cost of an average revenue of a Pharma company which is possibly the highest, comparing other industries. Supply of such goods between two parties as promotion materials / free samples is set to bring under the GST scanner now. If this happens, ‘Free Supplies’ of a Pharma industry will adversely affect the promotion practices of Pharma Industry – mainly B2B segment.
Industry experts and CAs at KDK Softwares organised an internal workshop on assessing ‘Impact of GST on Pharmaceutical Industry in India’. The first base of the analysis was the review of draft of the GST Law.
Mr. Mohit Bhambani, CEO of KDK Softwares (I) Pvt. Ltd. said, “While major concern remains on the GST rates, taxability and valuation of inter-state stock transfer, Provision for imported goods amongst others, for the Pharma companies; GST on ‘free supplies’ is going to directly impact on the cost of promotions of Pharma industry. Free supplies are normally a part of promotions of the drugs/materials and are given to the stockiest, doctors, Government and Private Hospitals and many cases to patients directly. One cannot recover the GST by input tax credit or by any other way. It remains as a cost to the supplier.”
Another aspect of this concern is to value such free supplies before putting a math of GST. As per one report of PWC ‘Decoding the Model GST Low – Impact on the Pharma Sector’ published in June 2016, the valuation of such samples/materials will be as per the GST Valuation Rules, i.e. the transfer value of goods of like kind and quality or the cost of sales.
Another point of free supplies is the case of ‘free services’ which needs to be cleared under GST regime. Pharma companies invariably receive services as promotional activity which are provided from multiple locations and received at multiple locations. There are also situations where it is not possible to determine the location of receipt of a service, for example, broadcasting, advertising, etc. In such situations, the Place of Supply provisions are unclear on which establishment would be regarded as the service provider/ receiver, in order to determine whether the supply is an intra-State or inter-State supply.