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GST exemption on hand-sanitiser has the potential to increase price of domestic products and incentivise import from China: Read how

GST exemption tend to discourage domestic manufacturing and incentives imports, which will be mainly from China

Yesterday the Authority of Advance Ruling (AAR) for GST said that all alcohol-based hand-sanitisers will attract 18% GST. The authority was responding to a Goa-based sanitiser maker which had contended that the product should be taxed at 12% as it is covered under the medicament category. But the AAR ruled that although the hand-sanitisers have been listed as an essential commodity during the Coronavirus pandemic, there is a separate notification for exempted goods and services under GST laws, and alcohol-based sanitisers are not in this exempted category. The GST authority has ruled that sanitisers fall under heading 3808 of the Harmonised System of Nomenclature (HSN), the GST rate for which is 18%, and some manufactures are paying 12% GST by wrongly classifying the product under heading 3004 with 12% tax rate.

This ruling has reignited the debate on GST on essential commodities. Many people on social media criticised the government for taxing hand-sanitisers during the current situation, when this product has become one of the most essential products to combat the Coronavirus. Several people demanded that hand-sanitisers and items required in the fight against the Chinese virus should be exempted from GST, given their essential nature.

CPI(M) leader Sitaram Yechury demanded that Modi government should immediately exempt all taxes on sanitisers and other essential items to save human lives.

Although whether hand-sanitisers should be taxed at 18% is a matter of debate 12%, the demand for GST exemption is actually counter-productive, although it may seem that prices will come down if the tax rate is zero, that is not true. This is because the GST is actually a VAT (value added tax), where tax is imposed on value added at each stage of production. Under this system, manufactures can claim input tax credit (ITC) for GST already paid on raw materials and capital goods. But if the GST of a product is nil, the manufacture can’t claim input tax credit. Therefore, the entire GST paid on the raw materials used in the product will get added to the final price of the product, which will drive up the price, instead of reducing it.

Actually, this matter was already settled during the debate on GST on sanitary napkins three years ago. Responding to the growing demand for nil tax on sanitary napkins from politicians, activists and media, the then finance minister late Arun Jaitley had explained why it is not logical to do so. He had said that lots of raw materials used in napkins are taxed at 18%, which the manufactures can claim as input tax credit, while the GST on the final product is 12%. Now if the GST is withdrawn, the manufactures can’t claim the ITC for tax already paid on raw materials, which will have to be added to the selling price. This will make the sanitary napkins costlier then imported products, which are also taxed at 12%, therefore the locally made product will be at a disadvantage compared to the imported products.

The government at that time had to give in to demands from activists, and GST on sanitary napkins was reduced to zero in July 2018. But this didn’t result in any significant price reduction. While some companies did reduce price by a very small amount, many others didn’t, claiming that removal of the input tax credit has offset the benefit of 0 tax, and retained the same price.

The same calculation applies in the case of essential items like sanitisers and other such items, as prices as unlikely to come down if GST is exempted as the ITC will be blocked. Moreover, this will also increase the compliance burden for the manufacturers, as they will be required to maintain separate accounts for inputs, input services and capital goods. In case a manufacturer is not in a position to maintain separate account, they will be required to reverse the input tax credit on all inputs/ input services used in manufacture of exempted items after applying detailed calculations.

Moreover, exemptions tend to discourage domestic manufacturing and incentives imports, as the price of domestic products go up due to blockage of ITC. As there will no change in import duties, the cost of imported products remains same, while the cost of domestic product go up. Thus, if the GST is exempted, it will increase imports, which will be mainly from China.

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Staff reporter at OpIndia

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