Subir Roy

Senior Economic Analyst

Should the government tax vaccines, medicines and medical equipment essential for fighting the pandemic, particularly when a deadly second wave is sweeping the country, claiming lives at hitherto unprecedented rates?

This issue, raised by several Opposition leaders, is finding resonance in the public discourse. Former chief economic adviser Arvind Subramanian has sought the suspension of GST and import duties on all goods and services related to fighting the pandemic. This has lent credibility to the demand for tax waiver.

The government’s answer, put out through Finance Minister Nirmala Sitharaman, to the demand is that if the 5 per cent GST on vaccines and the 12 per cent GST on medicines were to be removed, the consumer would end up paying more. Since the manufacturers would then be denied input tax credit (ITC), they would pass it on to the consumers, who would thereby be paying more than what they are doing now.

GST or ‘goods and services tax’ —which combines the earlier excise duty levied by the Central government and sales tax levied by the states — has been introduced with the support of all (both the states and the Centre) to avoid what is called the ‘cascading effect’.

Earlier, a manufacturer paid excise duty to the Centre when the product left the factory. And then when the product was sold by the seller, he had to collect sales tax levied by the relevant state government on the post-excise duty paid value. So, sales tax was levied on the excise duty also.

Now, when the manufacturer sells the product, he pays neither the excise duty nor sales tax but a single GST at the rate levied for the particular product, with the collections shared by the Centre and the states.

The big change is that before depositing the GST that the manufacturer has collected, he deducts the GST that he has paid on the inputs that he has purchased. This is the ITC he gets. If there is no GST to be paid, then he cannot recover the GST he has paid on purchased inputs and so has to pass on the burden to the consumer. So, no matter how well intentioned the move to abolish the GST on vaccines and medicines can be, it is counterproductive because as a result, at the end of the day, the consumer ends up paying more.

Sitharaman’s argument is based on the above premise. It implies that Opposition leaders, by asking for the removal of GST, are ending up playing to the gallery without actually benefiting the consumer.

But tax experts say that there are ways in which you can serve the purpose of abolishing GST without hurting the consumer.

One solution they have suggested is that instead of giving a tax waiver on the final product that the consumer buys, what can be done is to waive taxes on the entire supply chain that goes into the making of the vaccine or the medicine. If the manufacturer has paid no GST on inputs, the absence of ITC for GST paid on supplies bought by him does not arise.

Another way out is to make the vaccines and medicines ‘zero rated supply’, which is making the supply chargeable at nil rate with refund of ITC. If this were done, the manufacturer would be able to get input tax refund on all the GST he has paid.

This facility is currently available to the exporters as also to the suppliers to special economic zones. As the exporter does not have to pay GST and so does not bill the importer GST, he gets a refund on the GST he has paid on inputs.

Different state ministers, who represent their states on the GST Council (the interstate body that is the final authority on GST), concur with this move. Some of them have said that they would move a proposal before the council to exempt all Covid-related supplies and raw material from GST by making the applicable rate zero.

If this looks like a major concession with serious revenue implications, then it can be undertaken on the understanding that it would be a temporary measure to tide over the period of the pandemic.

There is an obvious incipient danger in undertaking such a move. It would set a precedent. It could prompt state governments in the future to seek exemptions on other items of high public interest by using this route.

But one can hardly decide to not do something simply because it can set a precedent which can create trouble later. In fact, there is already a precedent. When the GST first came, it was levied at 12 per cent on sanitary napkins. Then after vociferous protests by women’s rights organisations, it was removed the next year and the NGOs have not complained of a price rise as a result.

There is yet another way out. It involves levying a nominal 0.1 per cent GST on Covid-related items, which would enable the manufacturers to claim ITC.

This is also, in fact, already being done when exports are undertaken by merchant exporters, that it is not the manufacturer but an entity which only does the exporting. The manufacturer pays taxes on inputs and input services, sells the goods to a merchant exporter at 0.1 per cent GST, and then gets a refund of ITC. The merchant exporter can get ITC on the 0.1 per cent GST he has paid and export the goods.

As things stand, those asking for the abolition of GST on Covid-19 related vaccines and medicines seem to be winning the argument. If the Centre wants to go on collecting GST on this account, to carry credibility, it has to come up with better arguments than it has done so far.