How will GST Exemption lead to Price rise?

The West Bengal Chief Minister recently requested the Prime Minister Narendra Modi to exempt COVID medicines and oxygen tanks from taxes. Several other states such as Odisha were also asking for tax exemption on key medicines.

The Finance Minister Nirmala Sitharaman recently said that full exemption of Goods and Services Tax (GST) on Vaccines will lead to increase in their prices. She replied back to the Bengal CM letter in Twitter.

Current Scenario

The GST rates for COVID-19 vaccines, drugs, oxygen concentrators are between 5% and 12%. It is applicable to the domestic supplies.

How will GST Exemption lead to price rise?

If full exemption of GST is given to the vaccines, then the manufacturers will not be able to offset (balance the effect) their input taxes. They will in turn pass them to the end consumers.

In Simple Terms: Let us assume that a vaccine is made of five components or raw materials. Now, these raw materials are subjected to GST. The manufacturer pays taxes in buying these raw materials. Now, if GST is exempted on the sale of vaccines, then the manufacturer will increase the price to maintain his profits. This price rise will be added to the price paid by the end consumer.

Government measures

The Finance Minister also highlighted the current COVID-19 vaccine benefits being offered. They were as follows:

  • COVID-19 vaccines are provided free of cost to the people who are 45 years of age and also to all frontline workers. Here the GST is paid by the Central Government.
  • Full exemption from basic customs duty and health cess has been provided to these items, that is, to oxygen containers, concentrators, vaccines, etc.
  • The Minister also explained that the if Rs 100 is collected as IGST (Integrated Goods and Services Tax), then Rs 70.50 is the share of the state. How? Of the Rs 100 IGST, Rs 50 accrues to the Centre and State each as CGST And SGT. Of the 50% of the Centre’s share, 41% is devolved to the states. Thus Rs 70.50 is in the hands of the states.

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