Fact Check

Why Rahul Gandhi’s GST-free Corona Demand Harms Domestic Manufacturers

Rahul Gandhi of the Congress party has come up with a new demand for government in the ongoing efforts of mitigating the Corona issue. Unlike his recent web press conference where he made unsubstantial claims, his recent query, on the face of it may seem convincing to many. He is demanding that the instruments related to Covid-19 prevention and treatment should be made GST-free. This ideal-sounding demand, if implemented, may harm the domestic manufacturers in reality.

There are three clear dangers in accepting Rahul Gandhi’s suggestion or demand.

  • The exemption will lead to the blockage of Input Tax Credit (ITC) thereby increasing the cost of manufacturing.
  • This will act detrimental to domestic manufacturing and makes it easy for other nations, like China, to export those items to us since they are not affected by this tax system.
  • It will not reduce the burden on consumer.

Let’s examine how the above-mentioned situation gets created.

GST is a value-add tax and at each stage of supply chain tax is collected on net basis on the value addition occurs in that stage. For a manufacturer of PPE, the GST liability may be as follows:

S. No. Items Cost (Rs) GST rate GST (Rs)
(1) (2) (3) (4)
Inputs
1 Fabric 300 5% 15
2 Other inputs, capital goods, input services 700 18% 126
3 Total inputs (1+2) 1000 Total ITC 141

(15+126)

Output
4 PPE 1175 12% 141
5 Net GST on output      ( Net of ITC) = (Output tax – Input tax)    

 = (141-141)

0
6 Net price to consumer (including GST) 1175 + 141 1316

 

In this case, even if GST on PPE is reduced to Nil, the total cost would remain unchanged. While GST exemption to PPE would make output GST as zero, the ITC (GST suffered on inputs) would get blocked (not usable) and would get added to the cost – it is but natural that any cost increment is essentially passed on to the consumer to maintain margins by goods and service providers.

Therefore, while the consumer does not gain from GST exemption, the compliance burden would increase for manufacturer. He would be required to maintain separate accounts of inputs, input services and Capital goods used for manufacture of PPE (exempted items). In case he is not in a position to maintain separate account, he shall be required to reverse the input tax credit on all inputs/input services used in manufacture of exempted PPE after applying detailed calculations.

In this example, there is a blockage of ₹141 at the domestic manufacturer’s end. Since the imported product would not suffer any such block ITC, they may get ₹141 per piece on domestic supply. Earlier also, there was similar demand of GST exemption of sanitary napkin which actually ended up burdening the domestic manufacturers.

At a time when there are many reports about sub-standard goods being exported from China, India is encouraging domestic manufacturers by undertaking crucial procurements wherever possible. The distortion in GST rates at this stage will trigger a chain-impact which is not good for domestic manufacturers.

On many items related to Covid-19, except sanitizers, basic customs duty and health cess was exempted for a period upto September 30, 2020.  This too has its share of shock to the domestic manufacturers, but the customs duty was reduced in the larger interest, considering that domestic supply may not have been sufficient to meet the immediate requirement.

But the GST exemption in one go will inflict grave injury on domestic manufacture capability.

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