GST & Vaccines: The Vax Tax War


Should the government levy GST on the life-saving vaccines?

State governments have made an impassioned plea that there should be no GST on vaccines and Covid-19 related drugs and medicines.

The Tamil Nadu Chief Minister has called for removal of GST on Covid-19 vaccines and other medicines that are used to treat the infection and to consult the GST Council and reset the rates at zero, till the pandemic is brought under control.

Responding to the various letters sent to the Centre, the Finance Minister has stated that “if full exemption from GST were given, the domestic producers of these items would be unable to offset taxes paid on their inputs and input services, and would pass these on to the end consumers by increasing their price.”

While this position is correct, there can be better innovative solutions to address the issue, which the GST Council, which is meeting on May 28, should consider.

Raw material exemption

If a significant number of raw materials that are required for manufacture of vaccines are imported materials, then there can be a customs duty and IGST exemption for import of the said raw materials and vaccines can be exempted without any Input Tax Credit (ITC) challenge.

The government can also consider exempting all raw materials, consumables, lab materials, plant and machinery, apparatus, equipment, testing services, R&D services, storage services, etc. that are used for manufacture of vaccines from GST and also exempt the vaccines from GST. While this would address the issue for the manufacturers of vaccines, formulations and drugs, it will still not address the ITC challenge for the raw material manufacturers.

‘Out-of-the-box’ thinking

The government can devise measures on the following lines:

(i) All suppliers of goods and services to vaccine manufacturers in India should be allowed to supply goods or services without payment of GST under a separate notification.

(ii) The definition of exempted supply can be modified to provide that it will not cover goods or services supplied to vaccine manufacturers. This would ensure that the ITC chain is not broken in the hands of such suppliers and exemption of vaccines can happen without any impact on ITC.

(iii) There are enough instances where the government has provided for such exclusions from the value of exempt supply. For example, interest is exempted from GST but it affects the ITC only for banks, financial institutions etc. and not others; Ocean freight in the export segment is exempted but without affecting ITC. Explanation 1 to Rule 43 of the CGST Rules 2017 provides that aggregate value of exempt supplies shall exclude certain items.

The effect of this provision is that while the exemption still operates, it does not affect the availed ITC and there is no requirement for proportionate reversal under Rule 42 and 43. The government can simply amend CGST Rules and insert a clause (d) to this explanation and provide that exempt supplies shall exclude value of supplies of goods or services supplied to a vaccine manufacturer or specified drug manufacturer without payment of GST under a notification.

Zero-rated supply

Currently exports and supplies to SEZ are zero-rated. This means that while no GST is applicable input tax credit will be fully available. The government can issue an ordinance and amend Section 16 of the IGST Act. Section 16(1)(c) can be inserted to cover such other categories of supply of goods or services or both as may be notified by the central government.

Once the ordinance is issued, then the Central government gets the power to notify zero-rated supplies. In exercise of such powers, vaccines and Covid-19 related drugs can be zero rated and thereby there will not be any impact on ITC taken by the manufacturers. The government can also provide for refund of the ITC availed by such manufacturers as an additional incentive.

With India seeing the worst in the pandemic with the second wave acting like a tsunami this is just not the time to be worried about deficits and depend upon GST revenues from vaccines and other drugs. Alternative solutions in the lines suggested above or even better ones are the need of the hour.

(The author is a Chennai-based advocate and a tax consultant)

Published on May 16, 2021