India is the undisputed pharmacy of the world, supplying over 60% of all vaccines and 20% of all generic drugs. This puts India at an extremely advantageous position, especially in this pandemic. But the sheer scale of the national immunization programme means that India is racing against the clock to vaccinate a significant portion of the 1 billion+ adult population of the country.
Though the PM Modi-led government has supplied over 200 million doses to the states free of cost, the surge in cases due to the second wave has prompted the Centre to allow state governments to procure the vaccines directly from manufacturers and also via global tenders, so long as the vaccines have been clinically approved by the Drug Controller General of India.
The decision to include vaccines and other critical medical supplies under the ambit of GST kicked off a political storm in India. Expectedly, the opposition caused a ruckus and their “leader”, Rahul Gandhi, slammed the Centre on Twitter, saying “Lives of people can be lost, but the tax collection of Prime Minister Narendra Modi should not be lost. (sic)”
But as usual, Mr. Gandhi and the opposition miss the woods for the trees. The insinuations of their statements were taken on by the Hon’ble FM herself in a series of tweets lambasting the shortsightedness and lack of judgment displayed by them.
She explained that the goods and service tax, or GST for short, rates varied from 5% to 12% on the supplies under consideration and on every ₹100 of IGST collected on an item, ₹50 accrues to the Centre and the States each as CGST and SGST respectively, with an additional 41% of the CGST revenue devolving to the States. This imputes a whopping 70% share to the states!
The FM then added the most critical piece of the decision. “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.”
GST is an ad valorem tax, meaning the taxation is dependent on the good or the service that is supplied, i.e. X% of the value. The output tax on supplies can be offset against input taxes paid for delivering such supply but an exemption would mean that the input tax costs cannot be offset.
In fact, GST on various goods and services used as input for supply of vaccines would range from 5-18%, however the output tax on vaccines is set at 5%, leading to an inverted tax structure and tax costs not offset would invariably be passed on to the consumer.
While zero-rating critical medical supplies, where supplies incur a 0% GST and all the resultant input credit can be claimed as a refund, is a reasonable option, current laws restrict zero rating to either exports or deemed exports and changing this would require an amendment, and those take time, unlike Mr. Gandhi’s publicity stunts.
