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!