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Constant checks, interpretation of draft GST helped Cipla migrate quickly: CFO Kedar Upadhye

LiveMint logoLiveMint 04-07-2017 Isha Trivedi

Mumbai: When the landmark goods and services tax (GST) was introduced in India at midnight of 30 June, preparedness for India’s largest tax reform since independence was not up to the mark in most sections of trade. The pharmaceutical sector too faced challenges.

Very few drug makers were able to raise GST-compliant invoices on the first day of GST rollout even as pharma companies were largely prepared for the new tax regime. Most firms spent the first two-three days migrating data to the GST network.

India’s third largest drug maker Cipla Ltd was one of the few companies that started billing under GST on the first day. The company generated its first GST-compliant sales invoice at 2:00 am on 1 July. The company proudly flashed a picture of the invoice on its official Twitter handle.

In an interview with Mint, Kedar Upadhye, global chief financial officer of Cipla said three things made it possible: Constant check and interpretation of draft regulations, making information technology (IT) systems robust and ready for GST and continuous connect and engagement with trade partners.

Cipla began preparations for this mammoth task of transiting to GST regime in a serious manner in October 2016. “Initially, everything was not known. In spite of the uncertainties and ambiguities, we launched our internal project for GST,” Upadhye said.

A cross-functional team was set up, which included people from finance, IT, sales and marketing, depot, manufacturing, quality, regulatory, human resource, and supply chain departments. The progress of this project was reviewed almost every 15 days, he said.

The company had mapped out more than 500-600 activities, which were taken care of by dedicated personnel. Key management officials went on field visits to get constant feedback from vendors, stockists, and retailers.

Across sectors, key challenges for implementation of GST were: Understanding the nitty-gritty of GST norms, upgrading IT systems, getting the entire supply chain registered on GST network, changing product prices and labels, managing inventories, limiting loss on pre-GST stock in trade, and changing business models.

“What I am telling you about the project, it appears that everything happened smoothly but there were periods when certain implications were not very clear but still we went ahead. What we realized is that external developments are not in our control but internally we can get our act together,” Upadhye said.

Constant checks and interpretation of GST legislation helped the company take appropriate positions, while engagement with trade partners ensured that majority of vendors and distributors were registered on GST network and there wouldn’t be difficulties in getting input credits, he said.

Upadhye said Cipla had realised that getting credit for stock in transition would be a challenge for stockists and hence the company planned for it in advance and ensured that all the stockists/distributors got maximum credit as possible.

Under the GST regime, most medicines are taxed at 12%, while life-saving drugs including insulin at 5%. According to industry experts, the tax burden has increased by 1-2%.

A major concern in the pharma sector was the transition to the new tax system, especially regarding inventories held on 30 June. On the pre-GST stock, distributors can avail of 100% credit on Cenvat if they possess a central excise invoice issued by the manufacturer, importer, super-stockists or carrying and forwarding (C&F) agents.

In case they do not have an excise invoice, then credit can be availed of only on 40% of the central GST. This meant some financial loss for distributors and therefore, they had started reducing inventories.

According to the All India Organisation of Chemists and Druggists (AIOCD), distributors had an average 17 days inventory as on 28 June, much lower than the 40 days at the end of May, but sufficient to meet demand.

In a LinkedIn post dated 1 July, Narayan Saraf, chief financial officer of India business at Cipla said, “We collaborated with our trade partners across the country, rallying behind the entire value chain, to make sure the switch to GST was as smooth as possible. Allaying their fears, we offered compensation for their losses & other financial support, to ensure availability of medicines to the patients and general public is not impacted.”

Not just Cipla, most pharma companies in the country promised some compensation for losses to stockists.

Among leading pharma companies, Cipla has the biggest presence in domestic market. In fiscal year 2016-17, India accounted for 38% of the company’s total sales of Rs14,630 crore.

Now that implementation of GST has been achieved, Cipla will focus on administration of the GST-related processes such as uploading data and filing of returns, and work with trade partners on re-stocking, Upadhye said.

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