Why Taxes (GST) on Vaccines necessary in citizens’ interest – The Big Picture – RSTV IAS UPSC

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In News: Finance Minister Nirmala Sitharaman has said that the goods and services tax (GST) on coronavirus-related drugs and vaccines is necessary so that manufacturers offset their input taxes and keep the prices low. She 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.

The Finance Minister was responding to a letter by West Bengal Chief Minister Mamata Banerjee to the Prime Minister Narendra Modi seeking GST exemption on various coronavirus-related drugs.

Why Sitharaman said GST exemptions will make Covid supplies costlier?

Taxes levied currently on these items: At present, 5 per cent GST is levied on domestic supplies and commercial imports of vaccines, while Covid drugs and oxygen concentrators attract 12 per cent GST.

FM’s argument against granting an exemption: The FM has argued that 

• If GST exemption is granted for domestic supplies and commercial imports of Covid-related drugs, vaccines and oxygen concentrators, manufacturers would not be able to offset the taxes paid on inputs and pass it on to consumers in terms of higher prices. 
• 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% GST rate ensures that the manufacturer is able to utilise ITC (input tax credit) and in case of overflow of ITC, claim refund. Hence exemption to vaccine from GST would be counterproductive without benefiting the consumer. In fact, a nominal 5 per cent GST is in the interest of the domestic manufacturer of vaccine and in the interest of the citizens.

The tax share accruing to the state’s from the GST levied on these items: If IGST of Rs 100 is collected on an item, states and Centre get Rs 50 each as SGST and CGST, respectively. In addition, 41 per cent of the CGST revenue is transferred to states as devolution. So out of a collection of Rs 100, as much as Rs 70.50 is the share of the states.

GST revenues collected from sale of vaccines: Half the amount is earned by the Centre and the other half by the states. Along with this, 41 per cent of Centre’s collections also get devolved to the states, resulting in almost 70 per cent of the total revenue collected from vaccines being given to states. Sitharaman said these items are already exempted from customs duty and health cess. Also, IGST exemption is provided for all Covid relief material imported by the Indian Red Cross for free distribution in the country along with goods which are imported free of cost for free distribution in the country by any entity, state government, relief agency or autonomous body on the basis of a certificate issued by a state government. The government has also provided full exemption from basic customs duty and health cess to their commercial imports.

Analysis: Can the Centre cut GST rates on COVID-19 vaccines, critical supplies?

An array of measures including reduction in GST rates, zero GST rate on critical raw materials, permitting GST-free imports as well as direct cash incentives to producers, can be used by the Centre to make COVID-19 vaccines and other critical supplies cheaper, tax experts have suggested.

At present, Goods and Services Tax is levied at the rate of 5% on vaccines and 12% on COVID-19 drugs and oxygen concentrators for domestic supplies and commercial imports. For oxygen concentrators imported for personal use, the government has reduced GST rate from 28% to 12% and waived customs duties.

Some solutions that can be explored include –

• Reducing the GST on final products as well as raw materials, or zero-rating supplies, would be a better option than an outright GST exemption. Reducing GST rates of raw materials could minimise the input tax credit issues and other options could also be considered to cut prices of COVID-19 supplies. The government can direct cash subsidies or incentives to pharma and COVID equipment suppliers.
• The government could take measures to slash costs, including a possible special incentive scheme to refund taxes, outside the ambit of the GST law. A concessional GST rate of 1% can be levied for COVID-19 vaccines. Suppliers would be allowed GST credit benefit, which could be claimed as refund under an ‘inverted duty structure refund’, typically claimed by pharmaceutical companies.
• Given the need for importing various COVID-related material for treatment and cure of patients, to augment current availability and to help people tide over the current shortage, a complete exemption to such material from the Integrated GST and other procedural requirements will help facilitate the import and clearance of such material.

Earlier in May, the government had allowed duty-free and GST-free imports of COVID-19 relief material, provided they are sent as free donations to State-government approved entities who will distribute the material on the ground for free. But imports of similar supplies purchased by Indian corporates or charities for free distribution in the country, still attract 12% Integrated GST, impacting the efficient use of scarce resources, an industry leader said. Moreover, accessing donated foreign aid may be difficult even for State-approved entities in the absence of an explicit exemption from the Foreign Contribution Regulation Act, which requires any entity getting foreign aid to get a Home Ministry approval.

Connecting the Dots:

1. The taxation structure on Covid drugs and other essential medical equipment
2. In the light of the ongoing COVID-19 pandemic and the preparedness to deal with the upsurge in cases, what lessons can be learnt by India’s healthcare sector? Discuss.