GST exemption for Covid drugs unsound

The Centre is right to turn down requests to exempt vaccines and Covid-related drugs produced domestically from the goods and services tax. GST captures value addition in the production chain as manufacturers can claim credit for all the taxes paid on inputs. Exemptions break up the input tax credit chain. If manufacturers cannot offset the taxes that they pay on inputs used to make the final product, it will result in the accumulated taxes being recovered from the consumer. So, it makes sense to retain GST on drugs and vaccines, as unclaimed input tax credits could, in the absence of the levy on the final product, cumulate in the retail price.

Vaccines attract 5% GST and drugs (Covid drugs and oxygen concentrators) attract a 12% GST. The case to lower GST on drugs is compelling. The other option is zero rating of vaccines and drugs — just as exports — to keep the chain unbroken, the retailer collects zero rate of GST from the consumer and collects input tax credit. However, the tax payout is not a major consideration from a patient’s point of view. What is insignificant for an individual could add up to something that makes a difference to the exchequer. And the government needs all the revenues it can muster to fight on many pandemic fronts. A low, uniform rate of import duty, say 5%, on all vaccines and their ingredients would protect the domestic industry, without burdening the vaccinated overmuch. In the long run, a robust, indigenous vaccine-making industry would lower the cost of healthcare for India.

Estimates show that the country loses about 2% of the GDP on GST exemptions. Exemptions must be scrapped.