GST Council: Major tax breaks with ‘zero rating’ of COVID essentials feasible, experts say

File image of Finance Minister Nirmala Sitharaman and Minister of State for Finance Anurag Thakur at GST Council Meeting (Image: Finance Ministry Twitter handle)

File image of Finance Minister Nirmala Sitharaman and Minister of State for Finance Anurag Thakur at GST Council Meeting (Image: Finance Ministry Twitter handle)

The Goods and Service Tax Council can consider ‘zero rating’, or complete tax exemption, to products crucially needed in the fight against COVID-19, in its next meeting on May 28, experts and analysts said.

The proposal was first publicly mooted by Bharatiya Janata Party’s Rajya Sabha member and former Bihar Deputy Chief Minister Sushil Kumar Modi in an article in the Economic Times on May 25.

“Not only would the products be exempted from tax, but the tax paid on the purchase of inputs required for the manufacture of such products would also be refunded to the manufacturer. Zero-rating would, thus, remove all taxes on these products and will help lower prices,” the BJP leader said.

The GST Council meeting comes at a time when many states are forcefully demanding that taxes should be removed or reduced for oxygen cylinders, ventilators, concentrators, and life-saving drugs like Remdesivir, which many COVID-19 patients need.

“The GST Council may deliberate on keeping COVID-related medicines and equipment under the ‘zero-rated supply’ so as to allow seamless flow of input tax credits. The aforesaid will require amendment in IGST Act to the extent of expanding the definition of ‘zero rated supply,” said Prateek Bansal, associate partner at White and Brief associates.

This month, Finance Minister Nirmala Sitharaman, who will chair the council meeting, had spelt out the Centre’s stand on cutting rates on various GST supplies.

Sitharaman, in her response to a letter from West Bengal Chief Minister Mamata Banerjee, said that exempting domestically produced and commercially imported items from GST would make manufacturers unable to avail input tax credit, which in turn could lead to higher prices for customers.

The Centre has already exempted integrated GST on a number of imported items such as concentrators, medical-grade oxygen, ventilators, and life-saving drugs which come in through the donation route.

What is zero rating of goods under GST?

As per the definition by

The Central Board of Indirect Taxes and Customs defines “zero rating” as step that exempts the final product, along with inputs, from tax.

“In case of zero rating, not only is the output exempt from payment of tax, there is no bar on taking/availing credit of taxes paid on the input side for making/providing the output supply. Such an approach would in true sense make the goods or services zero rated,” the department says in its website.

The proposal by Sushil Modi was to enable working around the issues associated with input tax credit in case of reduction in rates of COVID supplies.

“Providing exemption from GST on domestic supplies may not be a good idea as it results in blockage of input tax credit, which adds to the cost. As a way out, the Government may explore zero rating /or nominal rate of 0.1% (like in the case of merchant exports) and may look at making the requisite legal changes to implement the same,” said Abhishek Jain, Tax Partner, EY India.

A senior official confirmed to Moneycontrol that ‘zero rating’ of goods would require legislative changes in the GST Act. The government can act on this after the GST Council takes a decision.

Other issues likely to be discussed

Analysts said the council was also likely to discuss other issues such as compensation for states. “Hope the GST Council is able to find an amicable resolution on these issues with consensus,” said EY India’s Jain.

“As a measure of temporary relief, the Council is expected to reduce the interest rate applicable on delay in payment of tax, undo or reduce the penalty imposed in case of default in the furnishing of returns, and extend the limitation period for filing of the refund claims with retrospective effect,” said Ajinkya Gunjan Mishra, Partner at L&L Partners.

Mishra added that the council could also consider requests for tax relief to some of the worst affected sectors of our economy.

Prateek Bansal said that the multiple GST rate-slabs have long been a contentious subject matter and perhaps the Council may look at ways to rationalize the GST rates and reduce the number of slabs. This comes amidst reports that the council could take up the merging of the 12 and 18 per cent tax slabs.

“Further, the Council may deliberate on providing an option of availing input tax credit to certain sectors (such as hospitality, real estate, etc.) which are worst hit by the ongoing pandemic,” Bansal said/