A common sight these days is people carrying small handy bottles of sanitizers everywhere they go; the magic potion has gained unparalleled popularity in India amidst the Covid-19 threat. Earlier, sanitizers were an accessory for the affluent class only; however, now even the villages in the country have these stocked up. With the pandemic soaring high, the manufacture and sale of sanitizers have gone up tremendously. The inclusion of sanitizers in the Essential Commodities Act, 1955 by the Government has ensured that the sanitizers are available 24*7 at all medicals, groceries, and Kirana shops.
With such mass usage of sanitizers, certain sections and industries had represented before the Government to exempt the sale of sanitizers from GST. It was proposed that the removal of levy of GST on the sale of sanitizer would ease the burden of the society at large as a sanitizer is being bought and used in bulk, especially by the medical community.
In April, there was a writ petition preferred before the Apex Court seeking direction to exempt sanitizers and face masks from the levy of GST. However, the petition was later withdrawn and hence dismissed. Recently, the Goa AAR in the case of Springfield India Distilleries [GOA/GAAR/1 of 2020-21/531 ] answered the question on the classification of hand sanitizer and the exemption from GST being an essential commodity. The AAR held that the alcohol-based sanitizers manufactured by the applicant would attract GST@ 18%. Further, the AAR also observed that the goods exempted under GST are covered under Notification no. 2/2017 dated 28 June 2017. Merely by the inclusion of a product under the essential commodities, the product doesn’t become exempt from GST.
Press Release Dated 15 July 2020
Better late than never, the Government finally intervened and issued a press release on 15 July 2020 on the subject, stating that hand sanitizers are disinfectants which shall attract GST @ 18%. The press release further stated that the inputs and input services used in the manufacture of sanitizers also attract GST @ 18%. Reducing the rate of the output product i.e. sanitizer would lead to an inverted duty structure situation. Such a situation would impair the domestic manufacturers and boost the imports as domestic players will face accumulated input tax credits. This is against the ‘Atmanirbhar Bharat’ policy of the nation. Hence there would be no reduction in the output GST rate of hand sanitizers.
With the press release coming in, various pleas which were made to exempt PPE kits, masks, ventilators, etc from GST, in the wake of Covid-19 would stand answered.
It is true that short term solutions to long term problems create havoc in the long run. Exempting these products would have been a short term solution. While on paper, these medical essentials would look as exempted from GST, their net price to the customer would have increased or remained the same. When the GST rate on inputs and/or input services is higher than the output GST rate, the input tax credit gets accumulated. This scenario is known as an inverted duty structure. Though such accumulated credits are refundable, the cost and compliance associated with it are painstaking. Further, the refund situation in the country is not very smooth and swift; thereby blocking the working capital for manufacturers from the time of accumulation to the time of granting a refund. Furthermore, this would also burden the Government machinery which is already saddled with humongous refund claims to sanction. The financial costs associated with this would invariably be added to the final product i.e sanitizer in this case. This shall make the domestic products unattractive and hence would boost imports.
One may wonder how exempting the goods from GST shall boost imports as the output rate shall be the same for imported products and products available in the domestic market. The differentiator is the duty paid on the inputs. The importer would not have paid any taxes on the inputs used but the Indian manufacturer would have paid taxes on its inputs. These taxes form a part of the cost as there is no credit available leading to a higher cost of the domestic product than the imported product. Hence it is said that exempting the goods would boost imports.
To avoid such a state of affairs, the Government has continued to subject sanitizers to 18% GST which in our view is justifiable considering the compliance hassle for manufacturers and no gain for end consumers. With the said press release, the Government has actually hit two birds with one stone. The classification of sanitizers has also been an issue considering its varied composition and uses. There are multiple entries wherein hand sanitizers could warrant inclusion attracting 12% or 18% GST. With the clarification, this issue also stands resolved as the Government has explained that sanitizers are disinfectants and attract GST@ 18%. Hopefully, there would not be any further discussions on exempting the other medical essentials like PPE kits, ventilators, masks as the same theory applies to those as well!