Why GST exemption is a bad idea

    To fight the Covid-19-instigated economic devastation, GoI and RBI have stepped in with incentives, cash doles and monetary policy support.

    Industry in India, like its counterparts elsewhere, are cutting their losses and biding their time for the crises to come to an end. There is also a misguided demand from some sectors seeking exemption in goods and services tax (GST) rates in general, and specifically on items that are needed in the fight against the pandemic: ventilators, personal protection equipment (PPE), Covid-19 test-kits, sanitisers, etc.

    Exemption of GST on the final product is never a good idea. It distorts the value chain. It does not necessary lead to reduction in prices. In fact, it adversely impacts domestic industry.

    Basic customs duty (BCD) and health cess have, incidentally, been exempted on ventilators, PPE and test kits till September 30. This was done primarily to meet the immediate need, domestic manufacture of these products being woefully inadequate. Any elimination of basic customs duty removes the protection that domestic manufactures have. But given the scale of the shortage, this was a prudent call to take.

    It is in this background that the clamour for similar exemption of GST in respect of these products needs to be examined. The duty structure on these items ranges between 5% on masks and PPE (if value per piece is up to Rs 1,000), and 12% in case the value is more than that, as well as in the case of ventilators; and 18% in respect of sanitisers.

    GST seeks to capture value addition at each stage of production, with credit of the tax paid on earlier stages in the chain available for offsetting the tax on the subsequent stage.

    Typically, when an exemption is sought on the end-product, the tax paid at various earlier stages of the manufacturing chain sticks to the product, the possibility of offsetting these taxes having been obviated by the exemption. This adds to the cost of the final product.

    Take PPE, which primarily act as a barrier between an individual and any viral and bacterial infection, including Covid-19. While PPE include gloves, masks, eye-protection, gowns, aprons, at its most basic, it refers to garments to protect health workers — that is, gloves, masks and gowns — in all of which the raw material is fabric.

    Fabric has a levy of 5% GST. The other liabilities, typically, are the various input services on which there is an 18% liability. Or, take the ventilator, an essential equipment that helps a patient breathe, consisting of safety valves, gas-mixture and metering assembly units, sensors, pressure measurement and medication nebuliser units, which have GST of 12-18%.

    At present, the liability of the inputs — be it 5% or 12% or 18% — is more than offset when discharging the 5% or 12% GST liability on the PPE or ventilator, the entire liability being ‘paid’ by the credit of taxes accumulated at the earlier stages of manufacture.

    By seeking to make GST on the final product zero, these manufactures will have the burden of the unutilised credit and, in the absence of any reduction either in the cost or GST rates of the inputs, will not be able to reduce the cost of the final product.

    Further, there is a compliance burden. Separate accounts will have to be maintained for inputs used in the manufacture of exempted goods and, in their absence, the input tax credit on inputs used in the manufacture of exempted goods will need to be reversed. Any such exemption will also lead to imports becoming cheaper.

    With BCD being nil, and the protection that the domestic manufactures gets in the form of integrated GST (IGST) —levied on imports at a rate corresponding to the GST rate — also removed, effectively, imports would become cheaper. This will severely hurt domestic manufacturers. Neither public interest nor that of manufacturers will be served by any such exemption.

    Hopefully, GoI is not considering the demand. In fact, as a general axiom, simultaneous exemption of both BCD and GST should not be allowed except in rare cases.

    The Central Board of Indirect Taxes and Customs (CBIC) should continue to utilise the lockdown period in ensuring all monies due to manufacturers and importers are refunded, rather than entertain such ill-informed requests.

    Source- Economic Times.

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