GST on vaccines – an unnecessary controversy?

Earlier this week, there was a controversy regarding the issue of Goods and Service Tax on the vaccine. There was a request made to waive the GST on COVID vaccines. That is, there was a demand to treat COVID vaccines as exempt items from the GST. The move was undertaken as several state chief ministers and other political leaders had objection to the premise that state funds will have to pay a GST on their procurement of vaccines using state funds.

There are two separate issues here – each one of them have to be addressed independently. Incidentally, the Finance Minister responded to these queries in the form of a twitter thread which can be accessed by clicking here.

Let us begin with the issue of GST exemptions. One of the biggest advantages of exempting certain goods and services from the GST is that it removes the hassle of filing of returns & dealing with regulatory compliances. The rationale for providing GST exemptions is to avoid levying taxes on items that are necessary (& form a major component of the consumption basket for the poor) such as food products.

COVID – 19 vaccines certainly do meet the criteria for an exemption. However, the same cannot be granted for various reasons. First pertains to the fact that GST by itself is a value added tax. That is, GST is levied at every stage of value addition in the production of a COVID – 19 vaccine. Thus, from raw materials to syringes, the entire supply chain attracts a tax at various stages. The tax paid at the previous stage is claimed as input by the final vendor while they pay the GST.

In the event that we suddenly make COVID – 19 vaccines exempt, there will be an issue of the settling of the tax amount that has already been paid at previous stages of production – whether it be for raw materials, or for any other services required as a part of the production process. Moreover, companies would find themselves holding sizeable inventory of such materials where they have already paid such a tax, and thus, by not allowing them to settle it against a final GST would only increase their costs. Thus, vaccine manufacturers would be at a disadvantage should the government suddenly decide to make vaccines exempt as they would have to bear the cost of the taxes that have already been paid on their existing raw materials. Further, future settlement of input tax credit also becomes difficult as GST would continue to be levied on critical raw materials.

For a detailed discussion on issues related to GST, please read a joint paper with Dr Arvind Virmani by clicking here.

One possible way to avoid the problem could be to exempt the entire supply chain, but that will add further complexity to the system adding several compliance costs. Moreover, even that will not solve the issue of settling existing tax which has already been paid by the companies on their existing raw materials.

It is therefore ideal that we do not tinker with the system as doing so will lead to sub-optimal outcomes and given the complex nature of supply chains, any such measure could end up shoring costs for vaccine manufacturers, which would ultimately be passed on to consumers, including state governments.

The second issue pertains to taxes – and again, this issue is critical as many believe that GST revenues are split 50 – 50 between the Union Governments and the States. This is not true, as even from the Central Government share, 41 per cent is transferred to states as their share in central transfers. This takes the value up to 70.5 per cent worth of revenue being transferred to states. Additionally, Union Government has agreed to compensate states in event of any GST shortfalls. That is, it assumes a 15 per cent nominal growth in GST tax revenues, and in case any shortfall happens then Union Government covers it using the Compensation Cess.

Moreover, the issue of GST accruing to states – or centre should have nothing to do at a time when India is pushing for a major vaccination drive. The entire focus should be on procuring vaccines as quickly as possible & ramping up the vaccination effort. More so, when we consider that several state Chief Ministers, including the CM of West Bengal had requested the Union Government to allow them to procure vaccines using their own funds. Now that Union Government has liberalized the vaccination policy, they should be spending more time in arranging for vaccines rather than discussing policy ideas that may find an emotive appeal but may end up having adverse implications for our vaccination efforts.

Given that states get a major part of the GST, and that its imposition allows manufacturers to offset input taxes thereby allowing them to reduce costs, there is no reason why states should create an emotive issue on this subject. Any tinkering, on the lines as proposed by those seeking an exemption for COVID – 19 vaccines would end up pushing costs, and thus doing more damage than any good. After all, as they say, the road to hell, is paved with good intentions.