The clamour for exempting essential COVID-19 relief material from indirect taxes is growing. Several petitions are pending before courts across the country, including the Supreme Court. The issue is regarding the affordability and availability of essential relief materials like ventilators, oxygen cylinders, concentrators, drugs and vaccines. There are two aspects to the debate. Firstly, an increase in price because of levying GST on manufacture and sale of the COVID-19 relief material and equipment within India. Secondly, an increase in price due to the levy of IGST on the import of these materials.
Finance minister Nirmala Sitharaman has publicly taken a stand that exempting COVID-19 relief material will result in an increase in manufacturing costs. Credit of the GST paid on the purchase of input materials and services will not be available to be set off against the final output GST liability. This phenomenon is also known as blockage of input tax credit when the end product is exempt from GST. Thus, there will be a corresponding increase or less than desired reduction in the price of the final products. The finance minister has also justified the imposition of IGST on import by stating that a substantial portion of IGST is shared with the states.
On the surface, the government’s response may appear to be reasonable but a deeper analysis of the problem reveals an undesirable mix of bureaucratic lethargy, static institutional thinking and legislative unwillingness.
Companies, charitable organisations and individuals have been importing oxygen concentrators, ventilators and other equipment due to a shortage in the domestic market. This attracts customs duty as well as IGST. To ease the costs, the government had completely exempted COVID-19 relief material from the levy of customs duty. However, the same benefit has not been extended to IGST.
The underlying objective was to make imports of COVID-19 relief material cheaper to the extent of the additional customs duty, so that people feel encouraged. If the local industry doesn’t have the infrastructure to scale up production, there is no adverse effect of imports. The demand will be met through imports, whatever the price and duty structure is. Hence, no prejudice is caused to the domestic industry by way of an exemption.
The government must understand that the basis and objective of exempting this customs duty remain the same for IGST as well. Not exempting IGST on imports in the same manner as customs duty is arbitrary. What makes matters worse optically is that import of oxygen concentrators for personal use without payment (like gift from family) invites IGST of 12%, whereas the import of the same equipment through a government-approved agency is not taxed at all. It seems as if the citizens are being penalised for taking care of themselves due to the government’s failure to ramp up the healthcare infrastructure in the past year. These issues make the stated policy open to challenge before the courts.
Apropos domestic transactions, it is true that the final prices remain low owing to the seamless adjustment of GST on raw material against the final output liability. It is also true that the price in an exemption scenario will not decrease by much as is being popularly anticipated. The same was hoped when the government was forced to exempt sanitary napkins from the levy of GST. The reduction was negligible, with no substantial benefit to the consumer as blockage of GST on input played spoilsport and increased costs. However, instead of using past experience and knowledge as a shield, the government will be well advised to use it as a sword and tackle the issue head-on. The current debate has exposed a shortcoming in the legislative text as well as the taxation policy, which needs to be addressed immediately.
Taxes are not just a source to augment revenues
The government shouldn’t view taxes as a source to only augment revenues. If intelligently used, tax levying powers can be used as a tool for social engineering. The legislature’s right to levy tax also includes the duty to grant relief to further a constitutional aim. This proposition is in consonance with our constitutional principles as well. The Indian constitution obligates the state to regard improvement of public health as part of its primary duties (Article 47). Interestingly, B.G. Kher, a learned member of the Constituent Assembly, while having a debate on Article 47 (in a different context) pointed out that the loss of revenue made economic sense owing to greater social benefits.
Article 41 further enjoins the state to, within the limits of its economic capacity, make provision for public assistance in cases of sickness. The Supreme Court has already held on many occasions that the state, being the parens patriae has to act in a meaningful manner as the father of the citizens of the republic. It is the ultimate custodian and guardian of their welfare. This approach has previously been tried successfully by the Centre on many occasions. Consider the concessional tax relief given on the sale of carbon credit certificates. This move has encouraged measures to protect the environment in commitment to the Kyoto Protocol. Similarly, in the aftermath of the Kutch earthquake in 2001, the Centre was quick to exempt excise duty on cement and steel, which was utilised for relief work. These policy responses resulted in greater social benefits at the cost of forgoing revenue.
What are the solutions?
A similar approach is the need of the hour now. It is not justifiable to collect additional amounts in taxes from people when they are trying to protect their lives during the pandemic. The government has many options to temporarily alleviate this. The entire value chain of manufacturing the COVID-19 relief materials can be exempted from GST. This will solve the issue of blockage of input tax credit and an increase in price.
Alternatively, the Centre can bear the cost of the blocked input tax credit, which can be refunded to the manufacturers and intermediate producers. Then again, it will be more helpful if these final products are merely ‘zero rated’ and not exempted. This would enable the manufacturers to claim a refund of the GST paid on inputs. The EU Commission has adopted a zero rating of VAT when acquiring coronavirus vaccines and testing kits. There may be legislative hurdles in achieving the ends through these means. However, to overcome these hurdles, the time is ripe to act in the interest of the public and public health by invoking the ordinance promulgating power to modify the legislative bottlenecks.
Recently, in the absence of any ordinance or GST Council meeting, the IGST rate was only conditionally reduced from 28% to 12% and then to 0% only on certain relief material by way of a simple notification (not for direct personal imports or philanthropic efforts). This shows that if there is some willingness, there is always a middle path that can be taken to address the issue. Even otherwise, there was never a more opportune time to call an emergency GST Council meeting than now.
The current turmoil also presents an opportunity to set our house in order as far as spending dedicated cesses are concerned. The Indian government has been levying health and education cess at 4% on direct taxes and a ‘social welfare surcharge’ of 10% on customs duty since 2018. Unfortunately, as per the CAG report, both have not been utilised since no dedicated new fund was established. These could have very well been utilised to neutralise the potential revenue loss the government may face owing to tax reliefs or to augment COVID-19 relief material work.
It is natural for the policymakers to face the dilemma of losing out on revenue while ensuring larger public good. But the survival of citizens is not a zero-sum game. The taxation policy should aim at bringing healthcare relief to the maximum number of people in an affordable manner. After all, salus populi suprema lex esto (The health of the people should be the supreme law). In these extraordinary times, the finance minister along with her state counterparts must look for out of the box solutions. The Beatles had sung in protest about the taxman, “If you get too cold, I’ll tax the heat”. It is now for the government to consider, when the nation is gasping for breath, if it will still tax oxygen.
Deepak Joshi is an advocate based in Delhi.