Should GST exemption be granted to Covid-19 vaccines?

A burning issue in the past few days is whether GST should be charged on the vaccines and other Covid-19 related products ?

At the outset, the answer which any sensible layman will give is – No, taxes shouldn’t be charged, especially in times such as these. The view is only amplified, if one follows prime time news shows.

But, there’s a catch, one which the layman is completely unaware of. Let’s unclutter this.

The entire issue is more about the GST structure and less of the actual taxation on vaccines and other related products and the credit on the inputs.

If one were to understand exact law and rules pertaining to Input Tax Credit (ITC), it is clearly mentioned that Input credit shall only be allowed if GST is leviable on the final product or if the sale of the final product is classified as a “zero-rated supply” i.e the product is either being exported or excursively sold to units within SEZs.

Hence, if the vaccines are exempted from GST, then the companies manufacturing them won’t get credit of taxes paid while purchasing the inputs for preparation of the vaccines. This will inadvertently lead to jacking up the price of the final product viz. the vaccine, by the manufacturer to cover its costs and maintain its profits.

Let’s understand by a simple example. ABC Ltd is purchasing inputs for manufacturing it’s vaccine worth Rs. 50 and paying Rs. 9 (18% – general rate) as GST on the said purchase, which becomes its input tax.
At the time of sale, it sells the vaccine at, say, Rs. 100 and charges Rs. 5 as GST (current rate). The customer pays Rs. 105 for the product, while the manufacturer makes a profit of Rs. 41. But wait- it also stands to get a refund of Rs. 4 (it paid Rs. 9 initially and of that Rs. 5 used to pay off as the tax on it’s actual sale of Rs. 100) and it has already collected Rs. 5 from the customer, which it can keep. So in effect, the manufacturer makes Rs. 50 (41+4+5).

In a situation, where the vaccines are exempted and the manufacturer collects only Rs. 100 from the customer- its profit from the entire deal will be Rs. 41 (100-59). The manufacturer will definitely not be ready to take this hit and it will naturally increase its selling price by the amount of shortfall i.e Rs. 9 (Rs. 50-41). So the new selling price which it will charge will be Rs. 109, thereby increasing cost for the end user by Rs. 4/-

This is a very crude example, but I hope you got the gist of how this works.

Complicated, no?

So what can be done to reduce complications for the manufacturer and benefits for the end user? In my opinion, the definition of zero rated supply should be expanded immediately to include these specific products, or a new supply type should be introduced wherein different goods and services can be placed during times of emergencies so that such situations don’t arise. Putting it in the lowest tax bracket of 0.25% can do no harm either.

In the long run, structural changes are needed to be made to the GSTN to accommodate for such contingencies, because it will be really difficult to micro manage what products and services to be exempted and what not to be exempted during times of emergencies akin to this. I feel the next GST Council meet is going to witness some spectacular showdowns – spectacular but unnecessary and uninformed.

So, the conclusion to the question above is that in the short-term, ceteris-paribus, GST exemption should not be given as it will do more harm than good.

But some quick action needs to be taken in this regard so that the cost is brought down by cancellation of the taxes levied.

If you’ve come this far- I would like to urge you, You – my reader, to get yourself and your family vaccinated at the earliest instance.

Wear masks and stay safe, because better days are just around the corner.

Until next time!

Farming Politics – What You Sow, What I Reap

How does a market work ?

Seller and buyer meet, buyer inspects the goods, both negotiate a price and conclude the transaction.

This is the most basic and common idea of how a transaction happens and this whole mechanism is broadly termed as market mechanism.

How does an Indian Agricultural Mandi work?

Seller and buyer meet, buyer inspects the goods, buyer decides the price and buyer concludes the transaction.

Unfair, right ?

But then, one might argue, that why does the seller sell? Why does he not go to some other buyer?

Well, it’s simple. All the buyers decide the rate before-hand and the seller is forced to choose one among the identicals. Law doesn’t permit him to sell elsewhere. Until now. (Okay, until three months ago, when the ordinances were issued).

Yesterday, two landmark bills were passed by the Rajya Sabha, namely – The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill and the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill (the Lok Sabha had already passed them earlier in the week) and now these bills are all set to become a law.

Yes, the bills were passed amid chaos and pandemonium.

Yes, proper procedures were not followed.

Yes, the bills could have been debated upon a fair bit more.

Yes, the nuances of the bills could have been a little bit more extensively researched.

But, overall, I still maintain that the bills were the need of the hour. Infact, these are the bills which should have been promulgated a lot earlier.

Now, you might ask, if the bills are all hunky dory and wonderful, then why are the farmers protesting?

Fair question, isn’t it ?

Again, the answer is simple but three fold.

Firstly, the farmers who are protesting are the big farmers from the northern States of Punjab and Haryana, where the Government Markets are very well organized and these bills aims to curb the unchecked power of these markets, which are wreaking havoc on farmers in the poorer states. (Remember when onions were sold at Rs. 2 per kg by the farmer but consumers paid Rs. 80).

Secondly, the farmers are generally unaware about the bills and since it is a matter of their livelihood, they can easily get influenced based on the facts being fed to them.

Thirdly, and majorly, it’s all about Politics. The government mandis are usually managed by ministers, MLAs, MPs. A check on these mandis means a check on these public servants.

And we all know, that it’s essentially the public, which is the servant in India – enough said.

What are the real benefits of these bills ?

Quite a lot, I must say.

The most important one being – Farmers have been freed from the mandis. This means that now, they can sell their crops to whomsoever they so desire. They won’t have to choose one among identicals, but rather, they will have the option to sell to the one who bids the highest. Also, they can sell their produce wherever they want to – intra-district, inter-district, intra-state, inter-state. All the boundaries have been erased. Government has also coined a slogan – One Nation, One Market.

Next, a concept of contract farming has been introduced. This is a total game changer. Farmers can get into contracts with the private players well before they’ve sown their seeds and lock a price. There is also a clause whereby, farmer will enjoy enhanced prices at the time of reaping, if the market prices are significantly higher at that point of time. Though, it should also be noted that benefit of this system will accrue to large farmers and co-operatives. Small farmers won’t be benefitted much and majority of Indian farmers are small farmers.

The role of middlemen will greatly reduce. These bills will surely dent their earnings but on the contrary, farmer’s incomes will increase and for an agrarian country like ours, that should be the primary aim and that is, in fact, the primary aim of these bills. Though, government should definitely think about alternatives for the middlemen as well, since they are also Indian citizens and have the equal right to life.

Lastly, consumers stand to benefit too. If the number of middlemen reduce, the prices also drop. So it’s a win-win situation for all, except the middlemen.

What next?

Most certainly, expect a lot of fireworks in the days to come.

The middlemen which I have been referring to in this entire write-up includes not just the traders but also, and not exclusively, big farmers, local politicians, ministers, state governments, etc.

These people, who have deep pockets and wield a lot of influence won’t sit idle as their clout fades. They will revolt. Not by themselves, but by stirring farmer agitations, bandhs and strikes, protest marches and so on.

What should the government do?

Majority of the farmers are being swayed by a few, who are peddling half truths like rollback of Minimum Support Price (MSP). It is interesting to note that MSP benefit is utilized by just 6% of farmers basis the volume produced, but nevertheless, it is a guarantee which a farmer holds very dearly. It is an assurance that if no one buys his crops, the government will procure it.

It may seem weird, but the government has already said that it won’t be rolling back the MSP. In fact, it has recently come out with the MSP for a variety of commodities. However, for some unknown reasons, it has been unable to write its own stance of not rolling it back in the new bills. This will certainly raise brows and it even should.

Next, the government should ensure that formation of buyer cartels doesn’t happen. If that happens, then all of this would be an exercise in futility.

Lastly, in my opinion, equal redressal opportunities should be given to both the parties. Currently, the benefits are well skewed towards the private players. For a bill (and soon to be law), such prejudices do more harm than good.

P.S. more research is required at my end as well. But here my intention was only to give a brief overview of what has happened, what is happening and what we can expect to happen.

More on it in the days to come. Cheers!