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Last Updated : Jul 24, 2018 09:22 AM IST | Source: Moneycontrol.com

Why no GST on sanitary napkins could actually make it costlier

A manufacturer generally has to pay tax at every stage of production, as well on the final product.

Shreya Nandi @shreyanandi15

Finance Minister Piyush Goyal on Saturday said that sanitary napkins will be fully exempted from Goods and Services Tax (GST), as compared with the existing 12 percent tax, a decision that is expected to make the product cheaper and affordable for women.

It may be good news for consumer activists and everyone who vehemently protested against the government’s decision to impose a high GST rate of 12 percent on the menstrual hygiene product.

Manufacturers, however, may have a different story to tell.

While the new rate will be effective from July 27, it may be too early to say if manufacturers will be in a position to pass on the benefit of lower tax to the consumers as they are busy doing the math to derive the revised price of the product.

Suhani Jalota, Founder and Chief Executive Officer (CEO) of MynaMahila Foundation, an entity which produces menstrual hygiene products, said that the government has responded in the right way by reducing GST on sanitary napkin but fully exempting it from tax is a surprising move.

“Manufacturers would have benefited if the Council had lowered GST to 5 percent instead of zero as most of the raw materials required to produce a sanitary napkin attracts 12 percent tax. Now, we will not be able to claim input tax credit (ITC),” Jalota said.

A manufacturer generally has to pay tax at every stage of production, as well on the final product. The biggest benefit of GST is that now the government refunds the entire tax it had collected on inputs or raw materials, provided the producer has paid tax on the final product.

As a result, no GST on the final product would mean that manufacturer of the sanitary napkin will not be able to claim tax credit.

Manufacturers fear that this may make the final product, sanitary napkin, in this case, more expensive.

Another executive at a sanitary napkin producing company said that zero percent tax on the product will make domestically manufactured sanitary napkins at a huge disadvantage as compared with imports, which will be zero rated.

“The decision will impact small manufacturers as they may not be able to compete with Chinese napkins as they can now be imported at a relatively cheaper cost,” the executive said, requesting anonymity.

Tax experts believe that the Council’s decision to exempt the menstrual hygiene product from GST will definitely make it cheaper. In fact, manufacturers should be wary as not passing on the benefit of reduced tax can attract anti-profiteering actions from the government.

"Manufacturers of sanitary pads would need to compare the impact of the reduction in the output tax from 12% to zero with the likely reductions in the input tax credits and pass on the benefits to consumers so as to comply with the anti-profiteering provisions," MS Mani, Partner, Deloitte India, said.

Ironically, ten days after the implementation of GST on July 1 last year, the Finance Ministry had issued a statement explaining that tax incidence on sanitary napkins before and after GST is the same or less.

“In pre-GST, days, they attracted concessional excise duty of 6 percent and 5 percent VAT and, the pre-GST estimated total tax incidence on sanitary napkins was 13.68 percent. Therefore, a 12 percent GST rate had been provided for sanitary napkin,” the statement said.

Major raw materials for manufacturing sanitary napkins attract 12 percent and 8 percent tax.

“If the GST rate on sanitary napkins were to be reduced from 12 percent to 5 percent, it will further accentuate the tax inversion and result in even higher accumulated ITC, with correspondingly higher financial costs on account of fund blockage and associated administrative cost of refunds, putting domestic manufacturers at even greater dis-advantage vis-à-vis imports,” the ministry had said.
First Published on Jul 23, 2018 07:12 pm
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