1. Whether GST shall be levied at 12% or 18% on the supply of sanitizers has been in debate in the recent weeks. Ministry of Finance came out with a press release dated 15.07.2020 stating that ‘hand sanitizers attract GST at the rate of 18%’. The said Press Release classifies the sanitizers in the category of disinfectants like soaps, anti-bacterial liquids, Dettol, etc. and therefore holds that it shall attract the rate of 18%. It also further states that reducing the GST rate to 12% will be a disadvantage to the domestic manufacturers as it will lead to the inverted rate structure as the inputs used for the manufacture of sanitizers attract GST rate of 18%. The Press Release further states that the same would be against the nation’s policy on Atmanirbhar Bharat as imports will become cheaper if the rate is reduced to 12%. It, therefore, concludes that the consumers would also eventually not benefit from the lower GST rate if domestic manufacturing suffers on account of inverted duty structure.
2. We tend to agree that the applicable rate of GST on the supply of sanitizers (alcohol-based or otherwise) should be 18% not on account of the economic argument given in the Press Release that the inverted rate structure will be detrimental to domestic manufacturers if the same are taxed at 12% but due to following provisions of law.
3. As per Sec. 9(1) of the CGST Act, 2017 the levy of tax is on the supply of goods or services “at such rates” as may be notified by the Government on the recommendations of the Council. Accordingly Notification No. 1/2017-Central Tax (Rate) dt. 28-Jun-2017 has been issued to notify the rates. Entry No. 87 of Schedule III of the said notification which stipulates the rate of 18% reads as under:
|S. No.||Chapter / Heading / Sub-heading / Tariff item||Description of Goods|
|87||3808||Insecticides, rodenticides, fungicides, herbicides, anti-sprouting products and plant-growth regulators, disinfectants and similar products|
4. Alternately Entry No. 63 of Schedule II of the said notification which stipulates the rate of 12% reads as under:
|Chapter / Heading / Sub-heading / Tariff item||Description of Goods|
|63||3004||Medicaments (excluding goods of heading 30.02, 30.05 or 30.06) consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale|
5. We need to therefore consider whether the sanitizers will fall under entry no. 87 of Schedule III as “disinfectants and similar products” attracting GST @ 18% or whether the same shall fall under entry no. 63 of Schedule II as “medicaments” attracting GST @ 12%.
6. The opening paragraph of the referred notification provides that the stipulated rate in the given Schedules shall apply on the supply of goods which should not only fall in the given tariff item, sub-heading, heading or Chapter but also meet the specified description. Also, last paragraph of the said notification states that “Tariff item”, “sub-heading” “heading” and “Chapter” shall mean as specified in the First Schedule to the Customs Tariff Act, 1975 and the rules for the interpretation of the First Schedule to the said Act including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification.
7. Now to determine correct classification we need to first examine whether the sanitizers will fall under the heading “3808” provided under entry no. 87 or not and also whether the sanitizers will satisfy the description “Insecticides, rodenticides, fungicides, herbicides, anti-sprouting products and plant-growth regulators, disinfectants and similar products” mentioned in the said entry. To determine the same we need to refer to the heading 3808 as specified under the Customs Tariff Act, 1975 and also refer to the rules of interpretation made in this regard following the provisions stipulated in the first paragraph of the given notification discussed in the earlier paragraph.
8. Heading “3808” under the Customs Tariff Act, 1975 also covers the goods of the same description as provided under entry no. 87 except with the condition that such goods shall be put up in forms or packings for retail sale or as preparations or articles. Further Rule 1 of rules for the interpretation provides that the classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes. Now to determine the meaning of the term “disinfectants and similar products” as mentioned in the heading under 3808 we shall have to take recourse to the Explanatory Notes under HSN as issued by WCO. Supreme Court in the case of CCE v. Wood Craft Products Ltd. 1995 (77) E.L.T. 23 (S.C.)has approved the reference to the Explanatory Notes since the tariff is patterned on the HSN formulated by WCO for which the said notes are issued. Relevant portion of the said notes under heading 3808 in context of sanitizers is as under:
Disinfectants are agents which destroy or irreversibly inactivate undesirable bacteria, viruses or other micro‑organisms, generally on inanimate objects.
Disinfectants are used, for example, in hospitals for cleaning walls, etc., or sterilising instruments. They are also used in agriculture for disinfecting seeds and in the manufacture of animal feeds to control undesirable microorganisms.
The group includes sanitisers, bacteriostats and sterilisers.”
9. It can hence be observed that although the term “disinfectants” appears to be limited to agents which are generally applied on inanimate objects, it also includes “sanitizers” expressly. Therefore the ambit of the terms used in the heading 3808 extends to even those goods such as sanitizers which are applied on the human hands and not just on an inanimate objects
10. On the other hand, the Explanatory Notes also provides that the said heading 3808 shall exclude “Disinfectants, insecticides, etc., having the essential character of medicaments, including veterinary medicaments (heading 30.03 or 30.04).” Hence the question to therefore answer is whether sanitizers are in the nature of medicaments and hence excluded from heading 3808 and covered under heading 3004 or not.
11. The term “medicaments” has not been defined in the CGST Act, 2017 or the Rules. Explanatory Notes on HSN defines the said term under hearing 3003 as under:
“This heading covers medicinal preparations for use in the internal or external treatment or prevention of human or animal ailments. These preparations are obtained by mixing together two or more substances.”
12. Said medicaments when put up in packing’s for retail sale are covered under heading 3004. It can thus be observed that the term “medicaments” do not cover only those medicinal preparations which are meant for the treatment of human ailments but also cover even those medicinal preparations which are meant to prevent human ailments. Now how far should one apply the test of “prevention” to determine whether the goods in question are medicaments or not is required to be understood?
13. Reference is again invited to the Explanatory Notes under heading 3003 in the context of “medicaments” which stipulate that it shall not cover goods (such as herbal infusions or herbal “teas” or food supplements) which are meant to contribute to general health and prevent possible nutritional deficiencies. Therefore we submit based on the intent emanating from the Explanatory Notes that the goods meant for general hygiene which may prevent the host of illnesses or diseases will not be considered as a medicament.
14. Reference here is invited to the decision of the Hon’ble Supreme Court in the case of Commissioner of Central Excise v. M/s Sarvotham Care Limited (2015 (322) E.L.T. 575 (S.C.)). Same is in the context of whether ‘Nizral Shampoo’ is a medicine covered under heading 3003 or not. The Court after considering the contents of the said shampoo (ingredients to cure an illness of viz. pityriasis versicolor seborrhoeic dermatitis and pityriasis capitis (dandruff)), warnings & precautions on the packaging (how the treatment should be given in terms of usage per week and adverse reactions from overdose) as well as the fact that such shampoo is usually purchased after doctor consultation held that as the predominant use of the product is to cure or prevent a specific disease, it shall be treated as a medicament.
15. Reference is also invited to another decision of the Hon’ble Supreme Court in the case of P.L. Pharmaceuticals Ltd. v. CCE (1995 Supp. (3) SCC 1) wherein it was held that the product Selenium Sulfide Lotion will be classified as a Pharmaceutical Product under Chapter 30 because the dominant use of the product was medicinal and was sold only on medical prescription as a medicine for the treatment of disease known as Seborrhoeic Dermatitis.
16. Applying the above propositions in the context of sanitizers we submit that even though,
a. The sanitizers are manufactured based on formulations recommended by WHO viz., Ethanol 80% (v/v) or Isopropyl alcohol 75% (v/v), Glycerol 1.45% (v/v) and Hydrogen peroxide 0.125% (v/v);
b. The manufacture and supply of sanitizers are also regulated under the provisions of the Drugs and Cosmetics Act, 1940;
c. Sanitizers can aid in the prevention of the human ailment in the form of COVID-19 disease;
it will be difficult to contend that the sanitizers are medicaments.
17. This is because based on the Explanatory Notes as well as referred cases, for the goods in question to be treated as “medicament” it should cure or prevent a specific ailment. Goods which are meant for general hygiene or well-being of a person which may incidentally lead to the prevention of a host of illnesses or ailments cannot be considered as a medicament. It is for this reason that goods like soaps, ordinary shampoos, etc. are not treated as medicaments. The factor that the manufacture of the goods in question is regulated under the Drugs and Cosmetics Act, 1940 cannot be the only criteria to classify the same as a medicament since the classification under law is based on the nature of the goods in question.
18. It may also be noted that the fact that WHO has prescribed the standard formulations to prepare the sanitisers during the COVID-19 outbreak will not be enough to contend that they are medicaments. This is because the WHO itself recommends washing the hands with plain soap and waterfor at least 20 seconds to prevent the spread of infections and decrease the risk of getting sick. If soap and water are not available, it recommends the use of sanitisers. Hence we submit that the use of sanitisers (even if manufactured as per the standard formulations) is only meant to prevent the spread of various infections (which may include COVID-19) and the same cannotbe the factor tocommand the classification as a medicament especially when the same is aimed for general hygiene and not as a cure or prevention of a specific ailment.
19. Based on the above discussions we would submit that the sanitizers will not partake the character of medicament. Therefore the sanitizers (alcohol-based or not) shall attract the tax @ 18% under heading 3808. Taking the position otherwise will attract litigation.