Charge 0.1% GST on Covid vaccines, medical items

Last week, the government rejected demands to fully exempt the Goods and Services Tax (GST) on vaccines, medicines and medical equipment used to deal with Covid-19 saying if a full GST exemption was given on these items, domestic producers would be unable to offset the input taxes paid and would pass them to the consumers by increasing their prices. Apparently, the govern- ment has not looked at better options.

GST is applicable on domestic supplies and commercial import of vaccines at 5 per cent and on Covid drugs, oxygen concentrators, etc. at 12 per cent. Many inputs and input services used to make these items attract GST at higher rates leading to an inverted rate structure. Currently, domestic producers can claim a refund of the input tax credit (ITC) accumulated due to the inverted rate structure. If the final products are fully exempted, manufacturers will not be eligible for claiming ITC and will factor in the taxes in the prices at the input stage. Few can disagree with the government on this.

However, the same reasoning was not adopted while exempting sanitary napkins from GST. When GST was introduced in 2017, the government ignored the pleas of women’s rights organisations and levied 12 per cent GST on sanitary napkins. After defending that decision for over a year, the government fully exempted sanitary napkins from GST in July 2018. The argument of taxes at the input stage flowing into the prices of sanitary napkins was abandoned.

Obviously, the government has not considered the option of charging a nominal, say 0.1 per cent GST, on Covid-related items, which will enable a manufacturer to avail of ITC.

Such a mechanism exists when exports are made through merchant exporters. Notification number 41/2017-IT (Rate) dated October 23, 2017 prescribes an integrated GST (IGST) rate of 0.1 per cent for the supply of taxable goods by a registered supplier to a registered recipient for export subject to specified conditions. Similar notifications are issued under the central GST (CGST), Union Territory GST (UTGST) and state GST (SGST) laws. These notifications enable a manufacturer to pay taxes on inputs and input services, sell goods to a merchant exporter at 0.1 per cent GST and then claim a refund of ITC accumulated due to the inverted rate structure. The merchant exporter can avail of ITC on the 0.1 per cent GST paid for the goods and other inputs and input services, export the goods without GST payment under a letter of undertaking (LUT) and claim refund of unutilised ITC on account of zero-rated exports under LUT.

The same template can be used to cut GST rates on Covid-related items. Of course, the suggested mechanism will result in lower revenues and also require the approval of the GST Council. That should not be difficult as most states will support the move in the public interest and their consent can be obtained through email or in a virtual meeting.

Thus, the government can show a stronger resolve and look at various options available for reducing GST rates on Covid-related items.