Notify Covid-19 vaccines as zero-rated supply under GST, say experts

Tax waiver on entire Covid-related supply chain could prevent a rise in price

Though Union finance minister Nirmala Sitharaman has ruled out a Goods and Services Tax (GST) waiver on Covid-19 vaccines over concerns of final price escalation, state finance ministers and tax experts remain sceptical about the argument.

While a GST waiver on vaccines would indeed deprive manufactures of the benefit of input tax credit (ITC), resulting in a price increase for end users, experts point out that a tax waiver for the entire input supply chain would help bring down the cost of vaccines.  

The other option, experts say, is to notify Covid-19 vaccines as ‘zero-rated supply’ under GST, which would enable manufacturers to get input tax refunds. Zero-rated supply is chargeable at nil rate with ITC refund and is currently allowed only for exports or for supply to Special Economic Zones.

In response to West Bengal chief minister Mamata Banerjee’s demand for GST waivers on Covid-19 vaccines, Sitharaman had said that doing away with the 5 per cent GST on vaccines and 12 per cent GST on medicines would deny manufacturers input tax credit, and that the cost would then be passed on to the end consumer by increasing the price of the products.

Chhattisgarh health minister, T S Singh Deo, who represents the state in the GST Council, told Business Standard that there should be no problem in waiving GST on the entire supply chain of Covid-related material, including vaccines. 

“The simplest way to waive GST on vaccines is to exempt Covid-related supplies and raw materials from GST. Make it zero. It will bring down the cost too,” said Deo. He added that he would write to the Union finance minister regarding this and also place the proposal at the next GST Council meeting.

A Jharkhand state government official concurred with Deo’s view and said that the Council should waive GST on the entire supply chain of Covid-19, even if it was a temporary measure, to tide over the current wave of the pandemic. 

Harpreet Singh, partner, KPMG, said that while exemption on any GST product could result in input tax credit blockage, “making the product zero-rated, i.e, making the supply chargeable at nil rate with refund of input credit, is an alternative through which GST benefit can still be passed on.” 

Singh added that this could be done as an exemption in the current situation, even though it could result in the government losing all revenue from GST on the sale of such products.

However, exempting the entire supply chain or notifying Covid-19 vaccines as ‘zero-rated supply’ may not be that simple.

Rajat Mohan, partner, AMRG Associates, pointed out that the move could set a trend and prompt state governments to seek waivers through this route. He added that this could also need a special resolution by the GST council. “Explaining it to the entire Council would be a tough task,” Mohan said. 

However, as the pandemic surges to catastrophic effect, demands for GST waivers on Covid-19 vaccines and related medicines are pouring in. Former chief economic adviser to the Government of India, Arvind Subramanian, has also pressed for the suspension of GST and import duties on all goods and services — domestic and imports — related to Covid-19.