The finance minister, Nirmala Sitharaman, tweeted about why the GST exemption on vaccines will lead to higher prices. A lot of people were confused by this and misunderstood what she meant. According to her, if full exemption from GST were given, the domestic producers of these items would be unable to offset taxes paid on their inputs and input services. What exactly does this mean?
From an accounting point of view, there are two types of GST- Input GST and Output GST.
While purchasing raw materials, a company pays its vendor a price which includes the GST charged on that particular product. The GST on its input raw materials paid by that company is recorded under that company’s name and paid to the govt. This GST paid by the vendor becomes input GST for the company that has bought the vendor’s products.
While selling finished goods, the company charges the customer a price that includes the applicable GST on the product. GST amount paid by the customer to the company is known as output GST.
Net GST liability of a company is the difference in its Output GST and its Input GST.
Simply put, Input GST is the tax already paid to the government by the vendor, on the company’s behalf. Hence the company is allowed to reduce an amount equal to the Input GST from its Output GST and pay the balance to the government.
Suppose a vaccine manufacturer is selling it at MRP Rs 100 plus 5% GST. That makes the price to be paid by the customer Rs. 105. Output GST in this case is Rs. 5.
Let’s assume that 40% or Rs. 40 is the manufacturing cost as below:
Natural Salts – ₹5 + GST @ 5%→GST is ₹0.25
Pharmaceutical Chemicals – ₹5 + GST@ 18%→GST is ₹0.9
Packaging – ₹5 + GST @ 12%→GST is ₹0.6
IT Services – ₹10 + GST 18%→GST is ₹1.8
Computers and Refrigeration Equipment – 15 + GST@18%→GST is ₹2.7
Total Input Cost = ₹40 + ₹6.25 GST
Hence, Input GST = ₹6.25
While, Output GST = ₹5
Net tax liability = ₹5 – ₹6.25 = – ₹1.25 which implies that the company will receive tax credits from the government.
In case GST on vaccines is reduced to zero, the company’s cost structure will remain the same, but they will not be able to claim any input tax credit. In that case:
Input GST = Nil
Output GST = Nil (assuming zero tax on vaccines)
So, the vaccine company will actually lose tax benefits it was getting due to the vaccine being taxed at a lower slab as compared to GST rates on its raw materials.
Which is why, Nirmala Sitharaman’s statement wasn’t incorrect.
Zero GST on vaccines would merely benefit the customers by reducing the price in the market. However, the private sector needs to be incentivized to manufacture vaccines.
Does that mean the FM cannot provide tax relief to Vaccine Manufacturers? I think they can. If vaccines are given same treatment as exports, then they can claim input tax credit even while output tax is zero. In such a situation, the market price is reduced for the consumers, while also providing the manufacturers an impetus.
So even though technically she was correct, I think this is a time the government can actually forego some of its taxes to benefit vaccine manufacturers.
The Echo-nomist 
Leave a comment