GST Exemptions on Medical Test Kits, PPE & Masks Might render Ineffectual
The experts have indicated that by providing an exemption of Goods and Services Tax (GST) on products and services which are being used to combat coronavirus such as Medical Test Kits, Personal Protective Equipment (PPE), face masks, etc. might turn out to be counterproductive. The rate of GST charged on PPE is at 5% if the cost of the product is below Rs. 1,000 and 12% when the cost of the product is above Rs. 1,000. In the same way, GST on masks is charged at the rate of 5%, on medical test kits and ventilators, it is levied at the rate of 12% each and rate of 18% is charged on sanitizers.
Some influential individuals are recommending the government to remove the tax imposed on such products and services and exempt them altogether. The main notion behind this recommendation is that such an exemption from GST will eventually bring down the prices of the products and services and will further prove to be helpful in the fight against the COVID-19.
The ‘Income Tax’ burden
While a government official explained that the exemption of GST will result in an increase in the cost of manufacturing and production of these specific products as the exemption will create a blockage of Input Tax Credit (ITC). He further described that the GST is a type of value-added tax (VAT). GST is levied on each level of the supply chain on a net basis while according with the addition of value on a particular stage. If the GST charged on masks is exempted, then the cost of the mask will also be the same but no amount of Input Tax Credit (ITC) will be credited to the manufacturer and hence, the manufacturer will add the total of ITC to the cost of the masks. Further explaining, he stated that the exemption of GST may not favor the customers very much but will definitely increase the burden on the manufacturer. Then the manufacturer will be forced into managing different accounts for inputs such as inputs for exempted products and other commodities as well. And, if he does not maintain different accounts, then also, he is required to calculate and reverse the inputs on exempted goods.
Tax Reduction to Zero
Harpreet Singh, partner at KPMG (Klynveld Peat Marwick Goerdeler) said that the exemption of GST from any such products and services might fail to achieve the aimed target and it will result in the obstruction in the flow of ITC. He added, “The right step could be to make sales of PPE zero-rated where no taxes are levied on sales and input taxes that go into the manufacturing of PPE are refunded”.
The partner at AMRG and Associates, Mr. Rajat Mohan expressed that the decision of exemption of GST will prove to be counterproductive rather than effective due to ITC. But, he also said that excluding the tax charged under GST will also remove the compulsion to compliances for the manufacturer under GST. He opined, “At this time, the margin is very high in such kits, thereby exemption would lower the cost of products in quite a few cases — especially where the tax rate is 18 percent due to application of ‘mixed supply’. This will save the chain from compliance of e-way bills also”.
Another official stated, “While the elimination of BCD may have been detrimental to domestic manufacturing, the customs duty was reduced in the larger interest of immediate need of such goods to deal with COVID-19, considering that domestic supply may not have been sufficient to meet the increased requirement”. He pointed out that the demands for exemption of GST on various products and services have seen a hike since the time the government removed cess and custom duty on ventilators, medical test kits, and masks till 30th September.
