Industries are cutting their losses and waiting for the time when the covid-19 crises to come to an end. There is also a misguided demand from some sectors who are seeking exemption in goods and services tax (GST) rates, specifically on items that are needed in the fight against the pandemic such as ventilators, personal protection equipment (PPE), Covid-19 test-kits, sanitisers etc.
Basic customs duty (BCD) and health cess have been exempted on ventilators, PPE and test kits till 30th September 2020. This was done to meet the immediate need of the pandemic. Any elimination of basic customs duty removes the protection of the domestic manufactures.
The duty structure on these items ranges between 5% on masks and PPE (if value per piece is up to ₹1,000) and 12% in case the value is more than that, as well as in the case of ventilators and 18% in respect of sanitisers. GST seeks to capture value addition at each stage of production with credit of the tax paid on earlier stages in the chain, available for offsetting the tax on the subsequent stage.
When an exemption is sought on the end-product, the tax paid at various earlier stages of the manufacturing chain to the product, the possibility of offsetting these taxes having been obviated by the exemption. This adds to the cost of the final product. At present, the liability of the inputs, be it 5% or 12% or 18%, is more than offset when discharging the 5% or 12% GST liability on the PPE or ventilator, the entire liability being paid by the credit of taxes accumulated at the earlier stages of manufacture.
If government exempt GST on the final product, manufactures will have the burden of the unutilised credit and in the absence of any reduction either in the cost or GST rates of the inputs, will not be able to reduce the cost of the final product. Separate accounts will have to be maintained for inputs used in the manufacture of exempted goods and in their absence, the input tax credit on inputs used in the manufacture of exempted goods will need to be reversed. Any such exemption will lead to imports becoming cheaper.
With BCD being nil and the protection that the domestic manufactures gets in the form of integrated GST (IGST), levied on imports at a rate corresponding to the GST rate and if removed effectively, imports would become cheaper. This will severely hurt domestic manufacturers. Thus , neither public interest nor the manufacturers will be benefitted by any such exemption.