The Gentlest Tax Of Them All

Context: Overview of different options before GST Council to provide relief on Covid-mitigation products.

Tax Inversion: Scenario where the rate of tax on inputs needed for manufacture of products exceeds the rate of tax on their sale.

Issues with exempting taxes on Covid-related products

• Exempting output products: This can be counterproductive as the credit facility would not be available and would intimately lead to the rise in the prices as the input taxes will be inbuilt into the selling price.
  • Further, the price rise in the case of goods that are at the lower rate of 5% would be generally higher than the price rise of goods taxed at 12%.
• Exempting the input products too: This is also not a feasible solution as many of the input products are also used for non-Covid management products and would entail a revenue loss.
• Conditional exemption: Whereby inputs are exempted only to the extent used for the manufacture of Covid-management products is problematic, as it would require the manufacturer to apportion the inputs.
  • This would increase the compliance burden and also poses problems for the tax administration with the potential for dispute.

Various options can be considered:

• Lowering the rate of tax: As has been done in the case of deemed export supplies where output attracts tax at rate of 0.1% + 0.1%.
  • Any positive rate of tax (other than 0%) would not lead to denial or reversal of credit, and the manufacturer can seek a refund of the same in case of overflow or ‘tax inversion’.
• Zero-rating Covid-management products: Where products will be exempted from tax and tax paid on the purchase of inputs will be refunded to manufactures.
• This would remove all taxes on these products and will help lower prices.
• In India, this option is available in the case of exports and supplies to and from units in special economic zones (SEZs).
• Further, there is a need for laying out precise rules for ascertaining such input tax credit since Zero-rating will pose the same problems as exempting inputs.
• Passing on the benefits on the input tax credit to the consumer must be monitored closely by the National Anti-Profiteering Authority (NAA), and the revised prices should be indicated along with the original prices.

Conclusion: GST Council needs to deliberate on all pros and cons of any move designed to provide relief and the likely fallout of any such move on all stakeholders.