The GST (Goods & Services Tax) Council meeting on Friday, which is taking place after a gap of almost seven months, is said to be heavy on agenda and is expected to be stormy given the impact of the pandemic on the economy.
There are two contentious issues before the Council: duty reduction or exemption on Covid related drugs, vaccines and other articles; and compensation to States on account of revenue shortfall.
The agenda moved for the meeting proposes no change in GST rate for Covid vaccines, PPE kits, N95 masks, hand sanitisers, thermometers, raw materials for Covid testing kits, besides some other items. However, there is proposal to lower GST for a limited period on items such as medical grade oxygen, oxygen concentrators, pulse oximeters, including personal import, and Covid testing kits.
The Opposition-ruled States are seeking complete exemption or zero-rated system for GST on all Covid related materials, including vaccine. They feel that unprecedent times need unusual measures. However, the Centre has always maintained that exemption or zero rate would not be the right approach as domestic manufacturers would not able to take input tax credit and hence will pass on the cost to consumers.
At the same time, zero rating of items for domestic consumption is not permissible under the law, this benefit is available only for manufacturers in Special Economic Zones (SEZs) where produces are for export only.
Relief with caveats
According to officials, the Fitment Committee of the GST Council which prepares rate revision proposals, has acknowledged the need for providing relief by way of concessions for Covid relief materials, but with some caveats. These include relief only through rate reduction, no upfront exemption (as it affects domestic manufacturing adversely), general lowest rate of 5 per cent may be opted for concession (if required), and concessions should be given only for critical items procured by patients.
An official said the committee has suggested five per cent rate on vaccine to continue as exemption will affect consumers. For Covid related drugs and medicines, the committee was of the view that if the Health Ministry recommends any medicine specifically the same may be examined for GST concession, he added.
On the issue of how revenue shortfall of the States will be compensated, a decision on borrowing mechanism may be taken. Last year too, this issue became contentious and finally the Centre went for borrowing (around ₹ 1.1 lakh crore) on behalf of States and disbursed them back-to-back. Now, for the current fiscal, out of the total estimated revenue shortfall of around ₹2.7 lakh crore around ₹1.6 lakh crore is to be borrowed. “The decision on the borrowing, the exact amount and the timing would be taken based on consultation with the RBI, Centre and States,” the official said.
The key issue here is assumption of 14 per cent revenue growth annually to calculate revenue shortfall for States and accordingly compensation to be provided. This provision is coming to end next year. States want this provision to be extended further, though concerns have been raised that 14 per cent rate is high and needs to be lowered. Now, as officials pointed out, this issue needs to be sorted out politically and then approved by the Council.