After West Bengal Chief Minister Mamata Banerjee wrote to Prime Minister Narendra Modi demanding an exemption from the Goods & Services Tax levies amid the pandemic’s escalating second wave, Finance Minister Nirmala Sitharaman launched a staunch defence of these levies on Covid-19 relief supplies, including vaccines and oxygen concentrators. She said that exemption to vaccine from GST would be counter-productive, without benefiting the consumer. Doing away with the 5 per cent GST on vaccines and 12 per cent GST on medicines would deny the benefit of input tax credit to manufacturers, who would then pass that as the cost to the end consumers by increasing the price.
It appears that the political factor, instead of mere revenue considerations and the need to balance the budget, is weighing on North Block’s refusal to accede to the philosophy behind the demand of Banerjee, who recently trounced the Bharatiya Janata Party in the state assembly election. Tax experts aver that an array of measures including reduction in GST rates, zero GST rate on critical raw materials, permitting GST-free imports as well as direct cash incentives to producers, can be used by the Centre to make Covid-19 vaccines and other critical supplies cheaper.
At present, GST is levied at the rate of 5 per cent on vaccines and 12 per cent on Covid-19 drugs and oxygen concentrators for domestic supplies and commercial imports. For oxygen concentrators imported for personal use, the government has reduced GST rate from 28 per cent to 12 per cent and waived customs duties.
The irony of the situation is that, if vaccines were given free, as is the case in most foreign countries, then the consumer of the vaccines would have been the government. Then, no matter at what rate it is taxed, it may not have impacted the pocket of the common man. Instead, it would have been a revenue-sharing issue between the Centre and the states.
Most political parties had promised free vaccines in the run-up to the recent assembly elections. In fact, Sithraman herself flew to Patna to make such an announcement for Bihar on the occasion of BJP’s election manifesto release. Recently, Opposition leaders, including chief ministers, had joined Congress President Sonia Gandhi in demanding that Covid-19 vaccines be provided free of cost to all citizens.
Better option
Under the present policy, the Centre is providing free vaccines to those above 45 years, while states and individuals have been asked to foot the bill for the rest. Tax implications matter not just for vaccines, but also other critical drugs and equipment. Some tax experts believe that reducing the GST on final products as well as raw materials, or zero-rating supplies would be a better option than an outright GST exemption.
Saket Patawari, executive director (indirect tax) Nexdigm, an advisory firm, says the government could take measures to slash costs, including a possible special incentive scheme to refund taxes, outside the ambit of the GST law. “A concessional GST rate of 1 per cent can be levied for Covid-19 vaccines. Suppliers would be allowed GST credit benefit, which could be claimed as refund under an ‘inverted duty structure refund’, typically claimed by pharmaceutical companies,” Patawari explains. Alternatively, the entire Covid-19-related supply chains could be taxed at 5 per cent, he suggests.
Given the need for importing various Covid-related materials for treatment and cure of patients, to augment current availability and to help people tide over the current shortage, a complete exemption to such material from the integrated GST and other procedural requirements will help facilitate the import and clearance of such material
Another option to cut prices of Covid-19 supplies could be reducing GST rates of raw materials to minimise the input tax credit issues. The government can also direct cash subsidies or incentives to pharma and Covid equipment suppliers.
Experts have also called for easing of imports of critical medical equipment and materials by exempting them from integrated GST, by putting end-use conditions in certain cases, if needed, to ensure they are not misused. “Given the need for importing various Covid-related materials for treatment and cure of patients, to augment current availability and to help people tide over the current shortage, a complete exemption to such material from the integrated GST and other procedural requirements will help facilitate the import and clearance of such material,” argues Bipin Sapra, partner at consulting major EY.
Earlier this month, the government had allowed duty-free and GST-free imports of Covid-19 relief material, provided they are sent as free donations to state-government approved entities who will distribute the material on the ground for free. But imports of similar supplies purchased by Indian corporates or charities for free distribution in the country, still attract 12 per cent Integrated GST, impacting the efficient use of scarce resources, an industry leader said. Moreover, accessing donated foreign aid may be difficult even for state-approved entities in the absence of an explicit exemption from the Foreign Contribution Regulation Act, which requires any entity getting foreign aid to get a Home Ministry approval.