349699 SIP myths you must know!

Exempting Covid-19 vaccines from goods and services tax (GST) might end up making them costlier for patients, Finance Minister Nirmala Sitharaman said in response to a demand from West Bengal Chief Minister Mamata Banerjee.

“If full exemption from GST were given the domestic producers of these items would be unable to offset taxes paid on inputs and input services and would pass these on to the end consumers by increasing their price,” the FM tweeted on 9 May.

The FM’s statement seems counter-intuitive but is plausible if the duty structure is inverted. The GST on vaccines is 5. But their inputs might bear a higher rate of GST. In sales tax, there was no provision for offsetting taxes already paid. Its replacement, GST introduced in July 2017, allows tax offsets or input tax credits. So the cascading of taxes is avoided, and only the value addition is taxed.

The FM would be right if GST paid on inputs exceeds the GST on the final price and the value of inputs was a large component of the retail price. The inputs that go into vaccine manufacture are taxed at a higher rate. For instance, the GST on ‘prepared culture media for the development or maintenance of microorganisms, (including viruses and the like) of plant, human or animal cells,’ is 18%. The rate is the same for phials, ampoules, laboratory chemicals, and enzymes.

Covid-19 vaccines are being sold to the central government at Rs 150 a dose. Assume this includes 5% GST (or Rs 7.14). If the cost of inputs was Rs 80 and the GST was 18% on them, the producers would be able to offset Rs 14.40 and claim a GST refund of Rs 7.26. If the vaccines were exempt from GST, the input tax credit would not be available and producers would pass it on if they had pricing freedom.

Continuing with the above example, if the value of inputs relative to the final price is low, say, Rs 30, the input tax credit would be Rs 5.40 and the buyer would be the gainer if Covid-19 vaccines were exempt from GST, because the 5% tax on the selling price of Rs 150 would be higher.

There is a parallel in the GST on sanitary pads. The 12% duty on them was withdrawn in July 2018 after a year-long protest. Tamil Nadu students sent sanitary pads to the Prime Minister. Kerala student union activists delivered them to then Finance Minister Arun Jaitley. Women’s rights groups and political workers joined in and there was countrywide outrage at what was perceived as a tax in menstrual hygiene which the government was promoting.

But the exemption made hardly any difference to buyers. Saral Designs, a Mumbai-based startup that provides product technology and designs for affordable menstrual hygiene, says the saving was 24 paise per pack of 10 pads, because producers could not pass on the GST on inputs, which remained unchanged. 

But zero-GST products can become cheaper if the government chooses to refund the tax on inputs, says Colin Rodrigues, Mangaluru-based chartered accountant, and a national GST trainer. This happens with exports that bear no GST as the principle is that goods and services are exported, taxes are not. Exports are exempt from GST but the government refunds the input taxes.

Given the demand for Covid-19 vaccines and medicines, sellers might hike up their rates even if GST was zero and the government agreed to refund the input taxes unless they are brought under price control.

Price controls are normally best avoided because they are bad optics; producers of innovative drugs will avoid a controlled market. There is a parallel in agriculture. Agribiotechnology companies like Mahyco have decided not to push ahead with genetically modified insect-resistant and herbicide-tolerant cottonseed after the agriculture ministry brought genetically modified plant traits under price control. Farmers are demanding the technology. In Maharashtra, they have planted unapproved HTBt cottonseed in the full glare of TV cameras and in defiance of the law, but there is no legitimate seed available.

In a pandemic situation, price regulation will be required. In April, six producers of Remdesivir reduced its price by Rs 1,300 to Rs 2,700 a vial of 100 mg. The selling price, after the reduction, ranges from Rs 899 to Rs 3,490. Remdesivir is a broad-spectrum anti-viral that is delivered through the veins. The National Pharmaceutical Pricing Authority (NPPA) touted the price reduction as an achievement when it could have perhaps forced the price down further without actually imposing a price ceiling.

Some Covid-19 medicines are quite affordable and do not need government intervention. The non-steroidal, anti-inflammatory drug Naxproxen sells for about Rs 33 per strip of 15 tablets in the recommended dosage of 250 mg. A strip of 10 tablets of 500 mg costs Rs 43.

The nasal spray, Budesonide, is under price control. Ivermectin, an anti-parasitic drug, is not, but it is off-patent and cheaply available. The World Health Organisation however says “the current evidence on the use of Ivermectin to treat Covid-19 patients is inconclusive,” and recommends that the broad-spectrum anti-parasitic agent “only be used within clinical trials.” Yet the government has recommended it and Bajaj Healthcare’s stock hit a 52 week high earlier this month after its Ivermectin formulation got regulatory approval.

Liquid medical oxygen, for which there is a wild scramble, is under price control. But Malini Aisola, Co-convenor of the All India Drug Action Network points out that the cap is on the ex-factory price and not the retail price.

The government’s advocacy of free markets is curious. While it has adopted a hands-free approach to Covid-19 vaccine pricing it has been hands-on in industrial policy with import duty hikes, incentives for domestic manufacturing and policy skews that favour brick-and-mortar kirana stores and domestic e-retailers.