‘Best not to recommend tax exemption for Covid-19 medicine’

A leading taxation expert and academic has said that it is advisable not to recommend tax exemption for Covid-19 medicines, especially for those having a lengthy supply chain with multiple staged input taxes.

“Any exemption under VAT/GST system will distort the tax system and may lead to a price increase for the ultimate consumer due to non-availability of input tax credit benefits to suppliers,” says Professor N Ramalingam, Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram.

In what he qualified as personal opinions, Ramalingam explained to BusinessLine the concept of exemption under GST and its implications. He also went on to propose three options before the GST Council for handling the exemptions under GST.

Can you explain the ruling GST rates for Covid-19 related medicines?

The Goods and Service Tax rates for the Covid-19 related medicines are vaccines at 5 per cent; drugs at 12 per cent; and oxygen concentrators at 12 per cent, and so on.

As per Section 2(47) of the CGST Act 2017, exempt supply is the supply of any goods or services or both and attracts (a) Nil rate (b) is wholly exempt from tax under section 11 of CGST Act 2017 or (c) is wholly exempt from tax under Section 6 of the IGST Act or (d) non-taxable supply.

What do a nil rate and exempt supply mean here?

Nil rate means the tariff rate or schedule rate is 0 per cent or nil, and there is no need to issue exemption notification by the Central or State Government to make it 0 per cent or nil rate. Please note that 0 per cent or nil rate is different from the zero-rated supply (i.e., zero-rated supply is only for export).

Exempt supply means the tariff rate or schedule rate has a rate (higher than 0 per cent), and the Government desires to exempt such goods/service and can issue notification under section 11 of CGST Act 2017 or Section 6 of the IGST Act based on the recommendation of the GST Council.

Non-taxable supply (section 2 (79) of CGST Act 2017) means a supply of goods or service or both not liable to tax under CGST Act 2017 or IGST Act 2017 (a tax which is outside the scope of tariff/schedule - liquor or goods or services not notified by GST council such as petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel).

What are the implications of the GST Council recommends exemptions?

If the GST Council were to recommend an exemption for the schedule/tariff rated goods (i.e., Covid related medicines at 5 per cent or 12 per cent) as per Section 11 of CGST Act/ Section 6 of IGST Act 2017:

As per provisions of the CGST Act 2017, credit on ‘input tax’ for inputs (raw materials/goods), inputs services (services) and capital goods (assets) used for the manufacturing of exempted goods will not be allowed.

How does this increase the price of the commodity at the customer end?

Due to restrictions in availing credit of the input tax, manufacturers will pass a load of disallowed input tax credit down to the wholesalers, retailers, and consumers. Hence the input tax burden under different stages with different tax rates ranging from 5 per cent to 18 per cent of input raw material, services and capital goods will pass to the consumer as hidden and embedded tax in the final price. This will increase the cost of the commodity.

In some cases, the price may come down even if the exemption is granted. This is so because, in the supply chain, the input tax burden is lesser than that of the output tax rate at the consumer level. In most cases, the price benefit will not be passed to the ultimate consumer.

How does this reflect in hospital billing?

Most consumers don’t purchase Covid-19 medicine directly from the counter; instead, it is provided by the hospital to in-patients.

As ‘healthcare services’ are exempted from GST, most private hospitals, while finalising a bill to patients, will not pass the benefit of price reduction in Covid medicines (though negligible if exempted as mentioned earlier) to consumers. Hence the intention of exemption for Covid medicines will not work in practice.

How are medicine manufacturers and the Government impacted?

Medicine manufacturers may end up dealing with cumbersome procedures of bifurcated input tax credits for inputs, input services, and capital goods while supplying taxable and exempted goods (medicines). This may further lead to further departmental notices, C&AG audit issues and ultimately evasion, corruption and less revenue to the Government.

Exemption/reduction in the rate of any goods/services from the angle of tax revenue head will lead to shrinkage in existing revenue to the States/Union Territories both in terms of the share of State GST and devolution of CGST portion to State (41 per cent as per the 15th Finance Commission).

What are the options available for the GST Council as it prepares to sit down for the next session?

Option 1: Instead of exempting the existing tax rate of the Covid medicines, introduce a 5 per cent tax on healthcare services through notifications. This will compel hospitals and the entire gamut of healthcare services activities to benefit from the heavy load of input tax credit to patients (ultimate consumers).

Once this is implemented, Section 171 CGST Act 2917 (Anti-Profiteering) will apply to all health service providers. This will, in the long run, through the appropriate Central and State GST Department intervention, curtail the price of healthcare services with better transparency.

Option 2 : Issue appropriate notification and bring Covid medicines under the purview of Deemed Export (Section 147 of CGST Act 2017). Under deemed exports, the input tax credit can be availed like zero-rated supply, and the benefit of exempting output tax of medicines will truly reflect in the price.

However, as mentioned earlier, medicines are not directly purchased across the counter, and most private hospitals will not pass the benefit of price reduction to inpatients in the final billing. In the longer term, this may lead to further litigation, official scrutiny, and C&AG audits as healthcare service is exempted.

Option 3 : Instead of giving benefits to the citizens under the Tax Revenue Head, the Central and State Government may share a tax refund subsidy (direct cash benefits) to targeted patients under the Expenditure Head.

This needs to be implemented under procedural protocol based on the strict evidence-based certification given by the hospitals and appropriate authorities. Therefore, the best option is option 1 or option 3 or a proper combination of both.

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