Covid-19 Vaccine – GST or no GST?

Pankaj Goel and Vishal Lahoti

Since last year or so, the entire country is going through tumultuous patches for society as a whole. Present second wave of COVID-19 has put the resources of country at greater strain wherein the entire mankind is struggling to keep their hope float leave alone the prospects of future. The problem is multiplied manifolds in view of huge population requiring an equal or in fact herculean effort to provide the relief to sheer number of people infected by the strain.

Government should be congratulated for bringing down costs of imports for COVID related goods, ranging from medicines to oxygen concentrators and other devices, by way of custom duty exemption notification. Withal, as rightly pointed out the by health experts around the globe, the panacea for India, in so far as COVID 19 is concerned, lies in vaccination of the entire population. As has been the trend and rightly so, policies are centred around the vulnerable population of the country while simultaneously ensuring that the vaccine should reach entire population quickly and in affordable manner. To ensure distribution at effective pricing, Indian government has requested to World Trade Organisation (WTO) that patents on vaccinations and other Covid related items should be waived.

Within the country, a debate has started to exempt the vaccines from GST with request coming from Chief Ministers, political parties to various NGO’s/ social agencies. While State Governments are favouring for NIL rate of GST i.e. complete exemption to vaccines, FM in its reply explained the perils of exemptions in terms of reduced input tax credits (‘ITC’) to manufacturer indirectly leading to increased costs of vaccines to ultimate consumers. While there might be some political overtones to it, this article tries to analyse the possible way out under the present GST framework wherein the objective of affordable vaccine to all can be achieved.

It is a common understanding that the burden of indirect taxes is borne by the ultimate consumer and indirect taxes has tendency to increase inflation by increasing prices at end consumers in line with increase in rate of indirect taxes. Intermediate manufacturing or supply chain passes tax burden on value-add basis as it avails ITC of GST paid by its suppliers. Thus, if chain is not broken, GST is levied only on the value add in whole process. However, if any product / process in the entire supply chain is exempted, the seamless flow of ITC is broken leading to higher base for levying GST on final product/services. Thus, to an extent, logic of not extending exemptions to COVID vaccine making it valid reason. Hence, thereby leading to a very logical and reasonable question about availability of a way around within the present GST framework. There are multiple approaches to address the requisite reduced rate for vaccines.

Simplest approach is to reduce GST rate on COVID vaccine to minimal rate. This would ensure continuity of seamless credits with simultaneous reduction in vaccine prices to ultimate consumer. COVID vaccine manufacturer can seek refund of unutlised ITC under inverted duty structure. However, issue still prevails with regard to refund of ITC related to input services which is still disputed and lying before Supreme Court (decision on matter is expected soon).

Another approach drove us towards concept of deemed exports. From pre-GST regime, certain supplies, though not exported outside India, were deemed to be exported and were known as deemed exports and there were several benefits available for such supplies. GST regime grandfathered the approach and retained the concept deemed exports. GST Act formalised concept of deemed exports by defining them as supplies of specified goods manufactured in India.

Once the supplied are designated as deemed exports, GST framework (with elaborative procedures) provides further benefits to supplier and / or recipient of such supplies in form of GST Refunds. Thus, deemed exports concept ensures goods manufactured in India and supplied to specified persons would result in zero / lesser tax burden.

On the basis of above probably the issue would be taken care of by:

1. Declaring supplies made to COVID vaccine manufacturer as deemed supplies and by allowing supplier or vaccine manufacturer entitled to avail refunds of underlying GST;

2. Simultaneously, reducing the COVID vaccine GST rate to minimal say 0.5%.

This would ensure no loss of ITC on account of inputs used in manufacturing vaccine while simultaneously allowing seamless credit of input services and capital goods. Also, this might obviate the need of seeking refund of ITC on account of input services as the outward liability would be sufficient to take care of such a credit.

Thus, to sum up the Government may resort to exemptions or rate reductions as outlined above to provide the relief to common man in terms of affordable vaccines. This would also go towards Atmanirbhar Bharat as would provide for localization of inputs to be eligible for deemed exports benefit. And last but not the least – leading to the fundamental of new Bharat – “Vasudhaiva Kuṭumbakam”.

Authored by Pankaj Goel and Vishal Lahoti