There is a debate over tax exemptions for COVID-19 vaccines and other drugs, or keeping them out from the purview of the Goods and Services Tax (GST). The debate picked up after West Bengal Chief Minister Mamata Banerjee wrote to Prime Minister Narendra Modi seeking an exemption from GST, custom duty, other duties and taxes on COVID-19-related drugs. Earlier, Odisha Chief Minister also demanded GST exemption on purchase of COVID-19 vaccines. To Banerjee’s letter Finance Minister Nirmala Sitharaman responded through a series of 16 tweets.
At present, COVID-19 vaccines are classified as goods under the GST HSN code-3002/3006. The supply of vaccine is taxable under Section 7 of the CGST Act. GST is levied at the rate of 5 percent on COVID-19 vaccines and 12 percent on drugs and oxygen concentrators for domestic supplies and commercial imports. At the current 5 percent, the GST rate is the lowest in the GST slab, after zero percent (which is also a tax rate). Under existing laws, the tax rate should be more than zero percent for obtaining input tax credit. Thus, a 5 percent tax rate ensures that the supplier is able to utilise the input tax credit and claim a refund in the case of an overflow of the input tax credit. As per Section 54(3) of the CGST Act, 2017, a supplier may claim refund of unutilised input tax credit at the end of any tax period. An overflow of input tax credit means excess of the tax paid on inputs on the output tax liability. This can be carried over to the next financial year till such time as it can be utilised.
Vaccines imported from foreign countries attract a 10 percent basic custom duty, a 10 percent social welfare surcharge under the custom tariff and a 5 percent IGST. However, through her tweets Sitharaman explained the exemption from custom duties, health cess, and IGST already available for COVID-19 relief material imported by the Indian Red Cross Society. The government is already providing full exemption from all duties to Remdesivir injections, Remdesivir API, etc. The demand for tax exemptions for COVID-19 vaccines should be seen in this light.
Contrary to expectations, under the given circumstances, an exemption from GST could increase the cost of vaccines. According to Section 2(47) of the CGST Act 2017, a product will be exempt from tax if it is a nil-rated supply, or exempted via a specific notification by the GST council, or kept out of the purview of GST. In such cases, the supplier would not be able to avail input tax credit. Since they are not able to offset the taxes paid, it is reasonable to assume that they would pass it on to the end consumers — and this would lead to a price rise. Thus, a GST exemption to vaccines will not benefit the customer.
There are, however, other measures that can be taken to make COVID-19 vaccines and other related drugs cheaper. These include a reduction in GST rates and a zero GST rate. Under a zero GST rate — not only is the output exempted from tax, but the entire value chain of the supply will also be exempt from tax.
However, at present all the supplies are not zero rated. As per Section 16(1) of the IGST law, the zero rated principle is applicable in export of goods and services or both and supplies to the Special Economic Zone only. The government should extend, via the GST council, the applicability of zero tax to COVID-19 vaccines and other drugs through a notification to change the tax slab from 5 percent to zero percent. This can be done by either refunding the taxes paid on the supplies which are zero rated, or permitting an input tax credit here as a special one-time case.
This money, which the state exchequer ‘loses’ because of free vaccinations, is not a big amount, and definitely not more than the catastrophe awaiting in the event of not being able to save as many lives as possible from COVID-19. As per the India Rating and Research, the cost of vaccinating India’s entire population above 18 years stood at Rs 0.672 lakh-crore. The total cost to be borne by the central and state governments would be only 0.36 percent of India’s GDP. The states would have to incur a major part of the cost — 0.24 percent and the rest 0.12 percent be by the Centre.
At present the central government is providing free vaccines to people 45 years of age and above, and all frontline workers, while the rest of the vaccinations will be paid by the state governments or individuals. In addition to free vaccination, the government should reduce the tax rate on other COVID-19-related drugs.
Amid the debate, the GST Council meets on May 28 and it is expected to discuss key issues such as tax waivers on COVID-19 drugs, medical devices, and health services apart from compensation to states in the backdrop of the second wave.