GST On Vaccine: A Curious Problem

Most arguments against a consumption tax such as the goods and services tax are to protect ordinary citizens from a higher tax burden.

That’s what makes this debate around GST on Covid-19 vaccines so curious.

Because as of now most vaccines are being administered free of cost to citizens, by either the central government or states. Sure, a small percentage of Indians are choosing to get vaccinated in private hospitals and there they will be charged 5% on the vaccine price they pay.

But broadly speaking, the GST being paid on vaccine purchases by centre and states will accrue as tax revenue to centre and states. One pocket to another.

Also, the amounts in question aren’t significant. Or maybe they are significant but not material to the budgets of either the centre or the states.

India hopes to vaccinate over 90 crore people. That is the approximate number of Indians above 18 years of age. About 30 crore of these will be vaccinated by the central government at Rs 150 per dose. That’s 60 crore jabs costing Rs 9,000 crore. At 5% GST, the central government will pay Rs 450 crore as GST.

The remaining 60 crore people are to be vaccinated by states, who are being charged a higher price by the two domestic vaccine producers. Assuming an average price of Rs 350 per dose, 36 states and union territories will cumulatively pay Rs 42,500 crore for 120 crore doses. And Rs 2,100 crore additional as GST.

These numbers are approximations, the more the vaccine doses required or higher their prices the bigger the GST bill.

This GST revenue will be shared between the centre and states in equal proportion, as the finance minister pointed out on Twitter on Sunday.

And eventually, a portion of the overall tax revenue of the centre is also devolved to states.

So, the net outgo for states is much less than the gross tax they pay.

Yet, why should states, in these financially tough times, pay any tax to the centre?

Why should life-saving vaccines not be exempt from GST? Even if currently only a handful of Indians have to pay the tax.

Besides, if Covid vaccinations become a frequent requirement, both centre and states may not afford continued generosity. And many citizens will have to share in the burden. Should they have to pay GST over and above the vaccine cost?

Yes, there are exemptions for certain life-saving medicines and equipment, said Pratik Jain, partner, Price Waterhouse & Co, LLP. “Given the current situation, there is a case for including vaccines in this list. However, providing an exemption would still mean that there would be some tax cost embedded in the price due to loss of input tax credit,” he added.

Dhruva Advisors Partner Ritesh Kanodia explained the undesirable impact of an exemption. “If an exemption is granted, and if the GST on input (could be 5,12 or 18%) and input services (which is generally at 18%) in totality exceeds 5%, then granting an exemption could result in an increase in the price beyond 5% GST on output. In addition to the above, there is also a requirement to reverse GST paid on common services which are used for both taxable and exempt supplies, a further additional cost.”

In which case, would zero rating the GST on vaccines be a better option? Like India does with exports. That means, no tax is levied on the sale of the goods but credit for GST paid on inputs is allowed, hence lowering the price of the item.

Ideally, zero rating would be a better option than exemption, Jain said. However, under the GST laws, zero rating is currently limited to exports and supplies to special economic zones, he added. Hence, this would need amendment in law, which would take time.

According to Kanodia, an abatement or rebate might be more suited solutions.

His suggestions:

1. Grant a 100% abatement (reduction in the taxable value) to the manufacturer say for a period of two years without impacting the right to take credit of GST paid on procurement — this can be done by way of a notification issued post approval in the GST Council meeting.
2. Central and state governments can jointly introduce a scheme providing for rebate/refund to the manufacturers for GST paid on vaccines and not collect it from end consumer. This could be issued for a limited time-frame (say two years).

Vaccines are in short supply in India. States and cities are seeking supplies from various new sources including imports. Those prices may be substantially higher than the current Rs 300 being charged for Covishield and Rs 400 for Covaxin. Russia’s Sputnik V, being imported by Dr. Reddy’s Laboratories Ltd., is likely to be priced at Rs 750 per dose. As prices rise, so does the tax bill.

Sooner, rather than later, the GST Council will have to find a way to spare citizens and states without penalising vaccine producers or their supply chains. For that the council will have to meet. It’s been six months since the last meeting.