Keep COVID-19 vaccines out of the GST purview

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.