The current situation from which we all are struggling and fighting day in and day out is to eliminate COVID-19 as soon as possible by undertaking vaccines as per the criteria’s set by Central Government regarding Age limits, and following COVID appropriate behavior in the form of wearing masks, sanitizing hands, and maintain sufficient social distance from one another, and in this background it is important to re-look at the GST framework adhered to by the government by taxing such essential supplies that are necessary to fight against COVID.
Lets look at the present mechanism and what it says is that at present, GST is leviable on COVID vaccines @5%, and on oxygen concentrators and other COVID related drugs @12%.
There were various objections that engulfed against such framework and asked for to exempt such essentials from the ambit of GST, but what our Hon’ble Finance Minister mentioned in response to such objections and representations was that eliminating GST on such essentials will deny the mechanism of ITC, as such manufacturers of vaccines won’t be able to able to set off their input taxes and that’s why the same will pass on to end consumers or citizens with a huge increase in their prices, thereby having a counter-productive effect on such citizens.
No doubt that such an argument does hold importance as a complete blanket exemption on vaccines and concentrators involved not only in inward but outward supplies also, would lead to a blockage of ITC to domestic vaccine manufacturers as well as suppliers, as per Section 17(2) of CGST Act of 2017[1]. Moreover, there won’t be any refund of accumulated ITC that will be available because Section 54 of CGST Act of 2017 provides for such ITC refund only when outward supply is Zero-rated or if it’s under the mechanism of inverted duty structure. But what needs to be understood here is that whether here the issue is only sustainable on the grounds of availing exemption of GST or if there’s something more to it that stakeholders were demanding or are demanding ?
A deeper and closer analysis will help us to understand that there were some alternative solutions that our government could have resorted that are given under the GST Law itself.
1. Zero-rated supply[2]: It refers to a mechanism wherein outward supplies are charged ‘Nil’ GST, but the concerned vaccine manufacturers/ suppliers are also provided with the benefit of availing Input Tax on input services, and that’s what make it different from ‘exemption’ as though outward supply in latter will have ‘nil’ GST, but claiming of ITC stands intact and admissible only in the former one, i.e. in Zero Rating of goods.
2. Giving 100% abatement: GST is calculated on value, and if the value of good is zero, GST value will always be nil, and government has this power to notify exemptions and abatements to certain goods or services, and provided the Central Government had done so, i.e. 100% abatement on COVID related supplies, which could have mean that for calculating GST, the value of COVID essential supplies deemed to be zero, then taxable value would be zero, which means that though tax rate is 12% or 5%, the net GST would have been zero, and moreover ITC would not have blocked as now it would have become ‘abated supplies’ and the same is different from exempt supplies as defined u/s 2(47) of CGST Act of 2017, since the latter includes only those supplies that have zero rate of tax or completely exempt.
3. Applying a minimal rate of GST on raw materials: For example, capping or restricting the GST @0.1% would have serve twin purposes of the government: first, no blockage of ITC, second, no complete exemption, and therefore would have remain cheaper for manufacturers as well as end customers as overall costs would have been significantly reduced. For e.g. earlier the Central Government issued one Notification wherein a concessional and minimal rate of 0.1% GST was prescribed on supplies to merchant exporters, and the same can be applied at this case.
4. Permitting GST free imports on one side, as well as at the same time looking at such measures to reduce costs, that will include a special incentive scheme for refunding taxes for such manufacturers or suppliers or such end consumers or a cash subsidy to such pharmaceutical manufacturers and suppliers, though outside the area of GST Law, can be looked at.
5. Allowing GST credit benefit, that can be claimed in the form of refund under the structure of ‘Inverted Duty Structure Refund’.
6. Recently one good move that happened amidst such debate was that IGST have been exempted on such import of COVID-19 relief supplies that are being received as donations for free distribution in India, and therefore can be imported free of cost by such State government/ relief agency/ statutory body, and one strong stand that Central Government is taking is that out of GST collected on vaccines or concentrators, as the case may be, almost half of them goes to States, and in addition to it, almost 41% of CGST collected gets devolve to States, and that’s why such States end up at getting almost 3/4th chunk of such revenue generated.
7. Above are some of the mechanisms that government could have resorted to for providing major relief to manufacturers, suppliers as well as the end customers, but the same are just the suggestions that can be looked at the upcoming meeting of GST Council scheduled to take place on 28th May, 2021, and the same are not limited, but various other measures or mechanisms can be resorted by Central and State Government jointly in ending up the debate of GST & Vaccine with allied relief supplies.
[1] It says that there will be a restriction on utilizing ITC if goods are used for exempting supplies by a registered person.
[2] Section 16 of IGST Act of 2017: At present, zero rated supply mechanism only available under export of goods or services and supplies to Special Economic Zones (SEZ).
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