[‘Daily News Updates’ will provide you with a simplified understanding of the important economic/financial events across the country]
GST Council to meet today; GoM Report to be discussed
The GST Council Meeting, chaired by Union Finance Minister Nirmala Sitharaman, will be held today to discuss a range of issues like rate cuts on medical supplies and compliance reliefs for small businesses. [The GST Council comprises of state finance ministers and is chaired by the Union finance minister]. It will look into the recommendations of a Group of Ministers (GoM), which was set up in the Council’s last meeting on 28th May to recommend GST exemptions on vaccines, essential drugs, ventilators, medical oxygen, masks, etc. in the context of COVID-19.
Read- GST: Demystified and The Final Structure of GST
For COVID-19 vaccines currently approved in India, a 5% GST is levied. While states do not have to bear this burden from 21st June 2021 (as the centre will procure 75% of the vaccines), there is no relief yet for the private hospitals that will procure the rest of the vaccines.
Similarly, for medical oxygen and other supplies like testing kits and oximeters, the rate currently stands at 12%, which is expected to be lowered to 5%. However, states demand that these items should be wholly exempted too. [5% is considered the ‘merit’ rate and is applied to most essential items like transport services, kerosene, edible oil, etc.].
Besides, small businesses also expect a framework for quarterly tax payments. Currently, while they can file returns quarterly, payment of taxes has to be done monthly. Thus, even this may be discussed in the meeting today. We will keep you updated with the decisions in tomorrow’s edition of Daily News Updates.
In the meeting held on 28th May, the Council left the taxes on medical supplies and vaccines unchanged. While the Union Government believes that exempting vaccines from GST will be counter-productive, the states argue that the relief should be considered amid the pandemic. The Union Government argues that a GST exemption will prevent the manufacturers from availing Input Tax Credit (ITC). What does this mean?
As mentioned earlier, GST is a uniform tax levied on value-added. Levy at each stage of sale/ purchase will be set-off against taxes paid by the supplier in the previous stage. Through this set-off mechanism, GST is levied only on value-added. To illustrate: Let’s say GST is 10 %. Continuing with our earlier example, if you make a packet of chips (manufacturer) and sell it for Rs. 30, your GST should come out to be Rs 3 (10 % of Rs. 30). But this tax is levied only on value-addition and so you’ll be allowed to claim a tax credit to the value of GST already paid by the supplier in the previous stage. Let’s say you bought raw materials (potatoes etc.) worth Rs. 10 for making chips. The supplier of the raw materials has already paid Re. 1 (10 % of Rs. 10) as GST. So, the chips manufacturer can claim a tax credit of Re. 1 and pay only the remaining Rs. 2 as GST. Thus, there is no cascading effect and no burden of ‘tax on tax.’
Source- /goods-and-services-tax-gst-demystified/
But this credit is not available for exempted supplies. Thus, the vaccine manufacturers will cover their tax payments (on inputs) by increasing the price per dose of the vaccines (which hasn’t been capped for private hospitals) and ultimately hurting consumers.
On the other hand, many experts argue that the Government can use the concept of ‘zero-rated supplies,’ which is currently available only for export of goods and services or supply to Special Economic Zones (SEZs). When an export is ‘zero-rated,’ no GST is levied on it, but the seller can claim ITC. The provision exists as a special measure to boost exports and businesses in SEZs.
Database for Migrant Workers Delayed; Centre tells SC
Last year, after the lockdown was imposed in March, India faced an unprecedented migrant workers crisis. We had published an article on the situation- “The pictures of the migrant workers walking hundreds of kilometres with families and kids have become the defining images of India’s fight against corona. The lockdown enforced due to the coronavirus outbreak led to a mass exodus of migrant workers from the cities to villages.” Most importantly, the article also noted that “due to informality and circularity, the Government has no database of internal migrants. Therefore, the Government’s welfare measures for the vulnerable sections of society do not reach them.” We had also suggested that every state Government must maintain a database of migrant workers. In the same month, the Central Government decided that a national database of unorganised sector workers (a large proportion of which are migrant workers) will be created and maintained.
The funding for this ambitious project was cleared in October 2020 by the Finance Ministry, and the database was to be functional in June 2021. However, the Government has informed the Supreme Court that the database will be functional in another three-four months, citing the second wave of the pandemic as the major reason for the delay. So how will the database help the workers?
It will have details of different social sector and welfare schemes run by the central and state governments targeting the unorganised sector workers. Besides this, the workers will also be able to avail of the benefits of these schemes by registering and applying through this portal.
Source- //theprint.in/india/governance/modi-govt-needs-3-4-months-to-roll-out-database-of-migrant-labour-sc-asks-why-the-delay/676312/
A migrant worker will be able to self-register using his mobile or going to the nearest service centre. They will be given a registration card with a unique account number. The Government also plans to link this database to different ministries to deliver services directly to the unorganised sector workers.
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What is the sharing pattern of tax collection between centre and states? Does the centre also shares part of the tax from its share with the state?
So, three kinds of GST are levied- CGST (goes to the centre), SGST (goes to the state), and IGST (divided 50-50 between centre and state). The recommendations of the 15th Finance Commission mandate the centre to give 42% of its own share to the states. Further, there is a compensation fund financed through cesses on items in the 28 % tax slab. The compensation fund was created to ensure that states can maintain an annual growth rate of 14% in their GST revenues. If it falls below 14%, then the centre compensates using the cess fund. This is the basic structure. But there have been ongoing disputes between the states and the centre over the last 1.5-2 years regarding the actual distribution.
If tax on vaccine is removed, then why will even manufacturers of vaccine pay tax in the first place to recover it from general public? I don’t understand the reasoning for “removing tax as counterproductive”.
Can you pls elaborate? Thank you.
Look at the example I have used in the article and let’s tweak it a bit. So I am a chips manufacturer who buys raw materials, i.e., potatoes worth Rs. 10, and pays an extra 3 rupees as GST (Let’s assume the tax rate on potatoes is 30%). So, in effect, I have paid Rs. 13. Now, I make the chips and sell one packet for Rs. 30, levying 10% GST. So, in effect, I sell it for Rs. 33 to the final consumer. Here, as a buyer of potatoes, I paid Rs. 3 in taxes and now as a seller, I have collected Rs. 3 from the final consumer. As per ITC rules, it will be set-off, i.e., I will deposit the 3 rupees (collected from the final consumer) with the Government and will get Rs. 3 in return for the tax that I paid on potatoes. In effect, I bought the potatoes for Rs. 13 and sold a pkt of chips for Rs. 33, making a 20-rupees profit.
Now assume that the Government exempts chips from GST altogether and the rules of ITC don’t apply. But I am still paying Rs. 13 for the potatoes (as potatoes have not been exempted from GST). Thus, in effect, I am paying Rs. 13 for the raw materials, but selling the chips for Rs. 30, making a profit of 17 rupees only (compared to 20 in the earlier case). In order to cover up for my loss, I will increase the price of one pkt of chips to Rs. 33. Ultimately, the final consumer doesn’t get any benefit, right?
Please tell me whether the explanation makes sense.
Makes sense. Thank you. But I don’t understand if this is case, why the govt cannot remove taxes from the raw materials being used for vaccine production? If they make the entire value chain (intermediates AND final product) tax free, the whole exercise would not be counterproductive.
There are several problems with that. First, does the Government even know every raw material which is used in making the vaccine? Assuming it doesn’t have to spend a lot of effort in gathering that information, can it practically remove taxes at every point in the supply chain of each raw material? And let’s say even that is done with minimal efforts, will it not encourage people to start demanding exemptions on every politically sensitive good, ultimately reducing the tax base? In my personal opinion, these temptations must be resisted (and anyway, the costs for achieving what you’re suggesting doesn’t seem to be worth the consequences).