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Sunday, June 13, 2021

Explained: The debate over vaccine GST exemption

Some experts feel categorising domestic supplies as zero-rated might be a better option than granting a full exemption, since it will pave the way for availing input tax credit.

Written by Aanchal Magazine , Edited by Explained Desk | New Delhi |
Updated: May 13, 2021 2:25:56 pm
Oxygen cylinders at the Thane District Government Hospital (Express photo/Deepak Joshi)

Several states have called for removing taxation on Covid-related medicines and supplies, including a GST exemption on vaccines. In response, Finance Minister Nirmala Sitharaman has said that exemptions on domestic supplies and commercial imports “would make these items costlier” for consumers.

Some experts feel categorising domestic supplies as zero-rated might be a better option than granting a full exemption, since it will pave the way for availing input tax credit.

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Who has demanded GST exemption?

Punjab, West Bengal, and Chhattisgarh have demanded a GST Council meeting to discuss waivers and exemptions for Covid-related supplies, drugs and vaccines. West Bengal Chief Minister Mamata Banerjee wrote to Prime Minister Narendra Modi on May 9 saying donors of Covid-related drugs and equipment had sought exemption from Customs duty/ State GST/ Central GST/ Integrated GST. “…I would request that these items may be exempted…to help remove supply constraints…and contribute towards effective management of Covid pandemic,” she wrote.

What is the Finance Minister’s argument?

On Twitter, Sitharaman said: “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/ 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.”

What is the tax on these items now?

A 5% GST is levied on domestic supplies and commercial imports of vaccines; Covid drugs and oxygen concentrators attract 12%.

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 such as vials, bioreactors, etc., which would be taxed at different rates (5%, 12% or 18%). Services such as warehousing for storage also get counted as input services (taxed at 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.

How much comes in from the levies? Is it shared?

Sitharaman said that if Rs 100 IGST is collected on an item, the states and Centre get Rs 50 each as SGST and CGST respectively. Also, 41% of CGST revenue is transferred to states as devolution. “So out of a collection of Rs 100, as much as Rs 70.50 is the share of the states,” she said.

On GST revenues collected from sale of vaccines, Sitharaman said half is earned by the Centre and half by the states. And 41% of the Centre’s collections devolve to the states.

These items are already exempt from Customs duty and health cess, she said. Also, IGST exemption is provided for all Covid relief material imported by the Indian Red Cross for free distribution, along with goods that are imported free of cost for free distribution in the country by any entity.

What are zero-rated supplies?

Under Section 2(47) of the CGST Act, 2017, a supply is exempt when it attracts a nil rate or is specifically exempted, but that is not equivalent to being zero-rated. Inputs and input services that would have gone into the making of the good or provision of service would have already faced a tax levy, and only the final product is exempted. GST-related laws do not allow availing of credit on inputs and input services used for supply of the exempted output. This becomes a cost for the supplier, and is usually passed on to the consumer.

Zero-rating makes the entire value chain of the supply exempt from tax. Not only is the output exempt from tax, there is no bar on availing credit of taxes paid on the input side for providing the output supply. As per GST-related laws, zero-rating is applicable for exports and exports and supplies to Special Economic Zones (SEZs). Addition of any other category would require a legal amendment.

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