Besides the raging COVID, dead bodies (without certificate of origin) floating down the great river brought to the earth by the legendary Ikshavaku King, and questions about the competency of the government to address the unprecedented health crisis facing the nation, the debate on how goods and services tax (GST) relief can be provided to vital aids to fight the virus like vaccines, drugs and oxygen apparatus has been hogging the headlines.
It has gained more vigour once the Centre passed the ball of meeting the cost of the vaccination to the states which already are stretched to breaking point fiscally.
GST was heralded as a monumental tax reform of this regime. Strangely, when the United Progressive Alliance (UPA) government was ready many years back to implement GST, the present prime minister (PM), who then was the chef minister (CM) of Gujarat stridently opposed it!
Leaving the unpleasant history behind, the new system, while integrating the national indirect tax grid to a significant extent and relieving the business of handling diverse state taxes, also ended up denuding the states of the key fiscal lever that remained with them and significantly subordinated the states’ autonomy to Central dominance.
With the result, the flexibility that states had, to modify tax rates in emergencies was lost to them, leaving them a slave to the newly created body of GST council that is significantly affected by the dynamics of party politics.
During the present crisis, the states are rightly clamouring for tax exemption on essential items needed to fight the COVID at least to partially offset the cost of doing so.
The Central government also created much ruckus in disbursing the compensation last year, which almost went down to the wire and thankfully a federal crisis was averted.
Finance minister (FM) Nirmala Sitharaman responded to the plea for tax exemption by her tweet “If full exemption from GST is given, vaccine manufacturers would not be able to offset their input taxes and would pass them on to the end consumer or citizen by increasing the price. A 5% GST rate ensures that the manufacturer is able to utilise ITC (input tax credit) and in case of overflow of ITC, claim refund. Hence exemption to vaccine from GST would be counterproductive without benefiting the consumer.”
She has repeated this position to every new appeal made from different quarters in the past few days.
How correct is the position taken by FM in principle and does she have the authority to take a view when the GST council alone can deal with any changes to the rate or the law?
The FM’ answer falsely gives the impression that exempting the final products will be detrimental to consumer interest as any exemption will result in the manufacturer having to bear the burden of input taxes.
In the present scenario, a 5% GST is levied on domestic supplies and commercial imports of vaccines; COVID drugs and oxygen concentrators attract 12% GST.
For a wholesale (B2B) transaction, the seller can claim input tax credit (ITC) by setting off the tax liability against the tax already paid. For example, a vaccine manufacturer would have inputs of both goods and services, which would be taxed at different rates (5%, 12% or 18%). These taxes can be claimed as ITC at the time of final supply and if the tax on output is higher than that on inputs, the final seller can claim an ITC refund.
If the final product is exempted, the law denies the input credit and thereby cascading of taxes happen that results in the price being jacked up to compensate the cost of unrelieved tax credits.
But there is another mechanism in the GST law where the output can be taxed at 0% and still the input taxes are not denied credit. This system is called zero rating, which is prevalent in European Union (EU) and other advanced countries that have GST. The zero rating is typically used for very essential goods and services like life-saving drugs.
India has inbuilt this mechanism in GST law and currently operates it for exports and supplies to special economic zones (SEZs). The benefit has not been extended to any goods or services.
This is the route the GST council should now adopt to concede the most legitimate requests for tax exemption. With this method, the manufacturers will avail the credit on all inputs and use the same against tax payment on other outputs subject to tax. If they do not have any such, the accumulated credit will be refunded periodically. No manufacturer will lose any money and the customers will get these life-saving items at a lower price.
The changes to GST structure would need to be passed as law amendment after approval of the GST council. The right course for the FM is to convene an emergency meeting over video conference, get approval for the law change and get the law issued as an ordinance in the absence of the parliament in session.
It is time to act and ask experts for help than keep tweeting incorrect and incomplete answers and waste precious time.
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)