GST waiver will make domestic PPEs costlier than Chinese products, advise tax experts

Covid-19: A PPE manufacturer pays 5% GST on fabric and 18% on other inputs, including services. The manufacturer gets tax offset from the 12% levy on the final product that makes net GST on the product to zero.

Government’s tax experts have advised the finance ministry against removing Goods and Services Tax (GST) on personal protective equipment (PPEs) because producers would not be able to avail credit of taxes paid on inputs of PPEs making domestic products costlier than PPEs imported from China, two officials with direct knowledge of the matter said.

A Central Reserve Police Force soldier stitches a Personal Protective Equipment (PPE) suit for health workers combating the spread of the new coronavirus in New Delhi. (AP)

The implication of removing GST on PPEs has been considered after the government received several requests on the ground that the exemption would lead to reduction in prices and hence would benefit the masses in fight against Covid-19, they said requesting anonymity.

“GST is a value-added tax and collected at each stage of the supply chain on net basis. Exemption would block input tax credit (ITC) as manufacturers of PPEs will pay GST on inputs but cannot claim ITC because the final product is tax-free. Thus, it will increase the cost of manufacturing,” the first person said.

The official said a PPE manufacturer pays 5% GST on fabric and 18% on other inputs, including services. The manufacturer gets tax offset from the 12% levy on the final product that makes net GST on the product to zero.

Therefore, while consumer does not gain from GST exemption, the compliance burden would increase for manufacturer, he said. “The manufacturer would be required to maintain separate account of inputs, input services and capital goods used for manufacture of PPE. 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 used in manufacture of PPE,” he said.

“While GST exemption to PPE, would lead to blockage of input tax credit for the domestic manufacturer, import would get price advantage over the domestic product. And substandard Chinese products will flood Indian market,” he said.

The government on April 9 exempted crucial medical equipment required to fight Covid-19 from basic customs duty and health cess for six months making imports cheaper up to 22%.

“Distorting the rate structure at the cost of domestic supplier may not be desirable in a situation where the government is the single largest buyer, which distributes PPEs for free,” he added.