Meenakshi  Jaiswal

Meenakshi JaiswalIn these tough times of growing pandemic where many state government has asked the centre for the waiver of GST on these life saving vaccines. Addressing the same Union Finance Minister Nirmala Sitharaman has said “If full exemption from GST (Goods and Service Tax) 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, resultantly it would be counterproductive”

So for the better understanding of a common man for decoding this problem. Following questions need to be addressed –

Are the sale of vaccines taxable under GST?

Vaccines are life-saving drugs, just like medicines, classified as goods under GST. The supply of vaccines for business purposes with consideration is taxable under Section 7 of the CGST Act. However, the manufacturer will not be eligible to claim the input tax credit on the raw materials or services used in the supply of vaccines obtained without any charge.

 What are the GST rates on vaccines for COVID?

The GST rate charged for the vaccine is 5%. ; The following are the particulars of HSN code under GST for vaccines:

Chapter Description HSN Code GST Rate
Drugs & Pharmaceuticals Animal and human blood vaccines 3002 /  3006 5%

Covid drugs and oxygen concentrators attract 12%.For oxygen concentrators imported for personal use, the government has reduced GST rate from 28% to 12% and waived customs duties.

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 when  the tax on output is higher than that on inputs, the final seller can claim an ITC refund in respect of the tax already paid by him on inputs used therefore ultimately reducing its output tax liability.

Since GST being consumption tax so its ultimate objective is to protect ordinary consumers from a higher tax burden. That’s what makes this debate around GST on Covid-19 vaccines so curious.

Since most vaccines are being administered free of cost to citizens, by either the central government or states. The direct impact of these free administration of vaccines would be on the state and centre budgets. Because if the government is exploring free vaccination to all the citizens, then the consumer of such vaccine will be the government. Thus, no matter at what rate it is taxed, it would directly result into more of a revenue sharing issue between the Centre and States.

As per the government reports India hopes to vaccinate over 90 crore people (approximate number of Indians above 18 years of age). Lets understand it with a example

Vaccinator Expected Population to be vaccinated by each No. of doses Approximate rates charged Cost incurred Expected tax liability @ 5%
Central Government 30 crore 60 crore doses (30*2) 150 9000 crores 450 crores
State Government 60 crore 120 crore doses (60*2) 250 30000 crores 1500 crores

These numbers are just the approximations, the more the vaccine doses required or higher their prices the bigger the GST bill.

Considering the current situation even if these vaccines are exempted from tax still it would make the prices of these drugs costly as for months, developed economies have hoarded vaccines and the raw materials needed to make them because of which the cost of vaccine production has already been very high for the  producers in India and if GST would be exempted then the burden of such exemptions would also be incorporated in their prices which would ultimately hurt the pocket of governments.

The reader has to properly understand what will be the implications of a complete tax exemption on these items. As per the GST law in India A taxpayer is not allowed to claim any input credit for GST paid on items which are exempted as such goods already enjoy 0% GST. ITC cannot be claimed for inputs used in such exempted goods as it will lead to negative taxation which means input tax would be greater than the output tax. So to completely exempt it from the tax cannot be a solution.

So what is the solution then?

To resolve this issue of an alternative approach in this is that categorizing these 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. In case of zero rated supply makes the entire value chain of the supply exempt from tax. Not only is the output is exempt from tax, there is no bar on availing credit of taxes paid on the input side for providing the output supply. But for accepting this approach the GST council has to make the separate provision for the same as zero-rating is currently applicable for only exports and supplies to Special Economic Zones (SEZs).

For better understanding the reader can go through the given table-

Supply GST Applicable Type of Supply Eligibility of ITC Goods
Nil Rated 0% Everyday items No Grains, Salt, Jaggery, etc.
Exempted Basic essentials No Bread, Fruits, Milk, Curd, etc.
Zero Rated 0% Overseas supplies, Supply to Special Economic Zones (SEZ) or SEZ Developers Yes Covid related essentials can be added here
Non-GST Supplies for which GST is not applicable but can attract other taxes No Petrol, Alchohol, etc.

 Concluding Comments

To overcome this situation several concessions are expected to be announced for the vaccine manufacturing companies under the income tax and GST laws in the form of tax holidays and exemptions. But in such cases, necessary steps must also be taken to expedite the refund of the tax credits on inputs and input services so that it does not lead to a price rise.

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June 2021