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GST exemptions on COVID-19 supplies: FM Nirmala Sitharaman’s response draws fault lines ahead of GST Council Meeting

West Bengal is the fourth state, after Punjab, Chhattisgarh and Delhi, to ask for GST relief on COVID-19 supplies. FM Sitharaman's response, that domestically made and commercially imported items may not be exempted, could become a potential flashpoint, which will require deft handling at the next Council meeting.

May 11, 2021 / 09:15 AM IST
Finance Ministe Nirmala Sitharaman and Minister of State for Finance Anurag Thakur (Image: Finance Ministry Twitter handle)

Finance Ministe Nirmala Sitharaman and Minister of State for Finance Anurag Thakur (Image: Finance Ministry Twitter handle)

Finance Minister (FM) Nirmala Sitharaman, on May 9, tweeted that reducing or exempting Goods and Services Tax (GST) rates on domestically produced or commercially imported items essential in the fight against COVID-19, will lead to manufacturers unable to avail of input tax credit, which in turn could lead to higher prices for customers.

Sitharaman’s series of tweets were in reply to West Bengal Chief Minister Mamata Banerjee’s letter to Prime Minister Narendra Modi seeking GST exemptions on vaccines and crucial COVID-19 supplies.

"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," Sitharaman said.

Banerjee is the latest among several state ministers asking for GST exemptions on products like oxygen cylinders, ventilators, concentrators, and life-saving drugs like Remdesivir.

Other states like Punjab, Chhattisgarh and Delhi have already called for GST Council meetings to discuss these issues.

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As Moneycontrol reported earlier, the Centre is mulling holding a GST Council meeting, perhaps by late-May, after a gap of six months.

With some states demanding exemptions and the Finance Minister making the Centre's stance very clear, analysts and experts say that the issue could be a flashpoint in the Council and will require deft handling by all stakeholders.

“It will become a political issue, a hotly debated one. It will be one where opinions will be expressed. The whole situation will require deft handling from the Centre as well as the states in the GST Council,” said a GST expert from the private sector, on condition of anonymity.

DK Srivastava, Chief Policy Advisor at EY in India, concurred. “On its own, it would not have been such a big issue, but combined with other festering subjects like vaccination, Centre and states’ handling of the pandemic, and other dimensions of COVID-19-related policy, when we read it together this may affect their relations even more, especially in the GST Council.”

The issue of input tax credit

Some experts like MS Mani, Partner at Deloitte India, however, believe there is merit in the Finance Minister’s arguments.

``Price to the end customer increasing is a function of competition among various products; you can’t unilaterally say what determines pricing. At a broad level, what the FM said makes a lot of sense,” he points out.

Says Mani: “When you have a product which is exempted, you are not permitted to take any input tax credit at all, be it on the inputs that go into the product, the services availed or the raw materials.”

According to him, products like vaccines, medical equipment, cylinders, drugs and others have a lot of domestic and imported inputs going into them, and consequently, if the products are tax exempt, the manufacturer will not avail input tax credit.

Adds the tax expert, speaking on request of anonymity: “None of the manufacturers have sought an exemption. This is coming from the states. The common people will obviously support exemption.”

EY’s Srivastava, however, points out that given the severity of COVID-19 cases across the country, some exemptions could be considered.

“My view is that these welfare devices being welfare oriented, there should be a serious consideration on easing the GST rate to some extent,” he explains.

Srivastava believes that the states have a valid point, but this issue can only be resolved by detailed calculation by the GST secretariat, which they could then use to illustrate the tax burden, or determine the costs in the event of an exemption.

On May 3, the Centre waived off integrated GST on a number of imported items like concentrators, medical-grade oxygen, ventilators, and life-saving drugs such as Remdesivir, Tocilizumab, and Favipiravir.

The IGST – or the Integrated Goods and Services Tax - and customs waivers are for items being sent to India by other nations as a form of donation and distributed by non-government bodies like the Red Cross.

However, what some states, including Delhi, Punjab and Chhattisgarh are asking for is clarity on the domestically- produced essential medical items.

Punjab and Chhattisgarh are among the states, which have sought an emergency meeting of the GST Council, to review the rates of life-saving equipment and drugs.
Arup Roychoudhury

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