The second wave of the pandemic has swept away large swathes of people with almost citizen experiencing the loss of near or dear one. The enormity of the wave left systems crippled, where both, the Central and respective State Governments, failed to provide medical facilities leaving citizens to rely upon SOS calls on WhatsApp, Instagram, Twitter, and other social media for leads for Hospital Beds, Oxygen, & specific COVID Drugs. Under this background, the Central government’s tax policy, relating to COVID specific supplies, deserves a closer analysis.
As of now, GST is levied at 5 percent on COVID vaccines, 12 percent on oxygen concentrators and COVID drugs. As of now, several stakeholders and States have called for exemption on Vaccines, COVID Drugs and Oxygen Concentrators.
In response to the letter of Chief Minister of West Bengal demanding exemption on COVID related supplies, the Finance Minister has publicly stated that the exemption on domestic supply of Vaccines, COVID Drugs and Oxygen Concentrators “would make these items costlier”.
In a series of tweets, Finance Minister said “If full exemption from GST 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. A 5 percent GST rate ensures that the manufacturer is able to utilize Input Tax Credit and in case of overflow of ITC, claim refund. Hence exemption to vaccine from GST would be counterproductive without benefitting the consumer.”
Finance Minister goes on to add, “in fact, a nominal 5 percent GST is in the interest of the domestic manufacturer of vaccine and in the interest of citizens.”
At the first blush the argument of the Finance Minister seems tenable for the reason that any blanket exemption on outward supply of Vaccines, COVID drugs and Oxygen Concentrators would block the Input Tax Credit available to such domestic manufacturers and suppliers in terms of Section 17(2) of the Central Goods and Service Tax Act, 2017 which provides that where goods are used by a registered person for effecting exempt supplies, Input Tax Credit availed on inputs utilized for effecting such exempt shall be restricted.
Further, even if Input Tax Credit is made available, the domestic manufacturers/ suppliers cannot claim refund of such accumulated Input Tax Credit as Section 54 of the Central Goods and Service Tax Act, 2017 allows refund of Input Tax Credit only where the outward supply is zero-rated or in case of inverted duty structure (where outward supplies GST at a rate which is less than GST applicable on inputs).
The Finance Minister is right to the extent that the blocking of Input Tax Credit and non-availability of refund of accumulated Input Tax Credit, if adopted singularly, would effectively result in increase in price of these COVID related supplies.
However, on deeper analysis, by limiting the issue only to the question of exemption, the government has missed the woods for the trees. The demands made by stakeholders concerns the overall lowering of tax burden on the producers, importers and buyers and is not limited to a mere exemption.
The demands concern cogent solutions which would eliminate the tax effect on COVID relates supplies and securing Input Tax Credit for domestic manufacturers and sellers both. A closer analysis establishes that if a sincere attempt is made, many solutions can be found under the extant GST law itself. Some of the solutions that are available with the government, within the confines of the existing laws, are enumerated as follows:
(1) Make COVID related supplies ‘Zero-rated’
‘Zero-rating’ refers to the concept whereby outward supply is charged to nil GST and at the same time, credit of input tax availed on input/ input services is admissible to an assessee. Zero-rating of goods is different from exemption of goods in the sense that while outward supply in both cases will attract nil GST, the difference lies in the fact that in case of zero-rating Input Tax Credit of the inputs/ input services shall be admissible to the manufacturer/ supplier.
As opposed to parroting pitfalls of blanket exemption from tax, if the government zero-rated the COVID related supplies, the problem highlighted by the Finance Minister that it would lead to blocking of Input Tax Credit and thus resultant increase in price would not arise.
Provisions relating to zero-rating are contained in Section 16 of the Integrated Goods and Service Tax Act, 2017 and currently only export of goods/ services and supplies to SEZ unit/ developers are zero-rated under GST. A simple amendment to Section 16 of the IGST Act, 2017 by deeming COVID related supplies as zero-rated would serve the purpose and can be done through the Ordinance route considering that pandemic situation and the previous precedence of the Central Government on this front.
The same would obviate the cascading effect on the price of these COVID supplies due to blocked Input Tax Credit as Input Tax Credit in case of zero-rating is admissible. In fact, supplier/ manufacturers would have been able to claim refund of the accumulated Input Tax Credit under Section 54 of the CGST Act, 2017.
(2) Grant 100% abatement i.e., reduce taxable value to ‘Zero’
GST is an advalorem tax i.e, GST is calculated by reference to a ‘value’. Therefore, if the value of an item is zero, GST on it, at whatever percentage, would also be nil.
Like any other taxation statute, even under GST, the government retains the right to notify exemptions and abatement. Instead of granting a blanket exemption, if the Central government had notified 100 percent abatement on the value of COVID related supplies i.e., for the purpose of calculation of GST if the value of COVID related supplies was deemed as zero, the taxable value of these items would be zero which in effect would mean nil GST (being advalorem tax).
The 100 percent abatement of taxable value would ensure that even if applicable GST rate is 5 percent or 12 percent as the case may be, the net GST on COVID supplies would be nil. Further, Input Tax Credit will not be blocked as abated supplies are not equal to exempt supplies. Definition of exempt supplies under 2(47) of the CGST Act includes such supplies of goods that attracts nil rate of tax or that are wholly exempt from tax under a notification. This measure would again obviate the cascading effect on the price of these COVID supplies.
(3) Cap GST rate on Vaccines, COVID Drugs and Oxygen Concentrators @ 0.1%
The whole premise of the argument advanced by the Finance Minister is that a blanket exemption would result in blocking of Input Tax Credit indirectly leading to increase in price of these COVID supplies.
The logical corollary would be that why should the GST @ 5 percent be applied as opposed to a minimal GST of 0.1 percent. GST rate of 0.1 percent would serve the same purpose as currently applicable rate of 5 percent . A rate of 0.1 percent would minimize the tax cost by at least 4.9 percent and at the same time manufacturers/ suppliers of COVID supplies would be eligible to claim Input Tax Credit. GST rate of 0.1 percent would mean that supplies are not exempt under GST and thus Input Tax Credit would not be blocked.
The government has in the past issued Notification No. 41/ 2017-IGST prescribing a concessional and minimal rate of 0.1 percent on supplies made to merchant exporters exporting goods thereby entitling such suppliers for concessional GST as well as Input Tax Credit. There is no discernible reason why such a concession cannot be granted to suppliers/ manufacturers of COVID supplies.
(4) Exempt Input/ Input Services used for COVID related supplies
Another option available before the government is a general exemption notification that would exempt all inputs and input services used by a supplier/ manufacturer of COVID 19 supplies from levy of GST coupled with a blanket exemption on vaccines, COVID drugs and oxygen concentrators.
Since all input supplies to suppliers/ manufacturers of COVID supplies are already exempted from payment of GST, a blanket exemption on vaccines, COVID drugs and oxygen concentrators would not entail blocked Input Tax Credit as no tax was charged on inputs/ input services in the first place. This will also overcome any misgivings of the government on granting a blanket exemption to COVID related supplies.
The above-mentioned options clearly establish that the Central government has various options, over and above the present measures undertaken. In short, the levy of GST on vaccines, COVID drugs and oxygen concentrators during a pandemic defies logic apart from being bad optically.
The government may resort to any of the above methods for removing tax effect on the COVID related supplies to provide the relief to common man in terms of affordable vaccines and drugs. The 43rd Meeting of the GST Council is scheduled on May 28, 2021 where the Central and State governments may mull over certain honest solutions.
If 71 percent of total GST collected devolves on the States as per the Finance Minister’s own admission, and if States are willing to forego the same, the Central government ought not to hesitate to forego the same. Of course, GST exemption is by no means an ultimate solution to the pandemic, but it will provide some succor to the grieving hearts and maybe a temporary boost to the economy.
 State of Punjab, West Bengal, and Chhattisgarh have demanded a meeting of the GST council to discuss GST waiver on these COVID related supplies. Several State Chief Ministers have also personally written to Prime Minister. A writ petition is also filed in the High Court of Delhi for IGST exemption on Oxygen Concentrators imported for personal use.
The author is a Counsel dealing with GST, Customs & Foreign Trade and an Advocate-on-Record, Supreme Court of India.