[Anmol Jain]
Anmol is a 3rd year student at National Law University, Jodhpur
Introduction
Goods and Service tax [“GST”] regime was implemented in India[1] with great hopes and number of positive aspiration, inter alia, removal of cascading effect of multiple indirect taxes, achieving uniform markets, increased regularisation of firms, simplified process.[2] The biggest of the advantage is that it has incorporated the existing indirect taxes imposed by Centre and State Governments on goods and services into a single tax called GST. Also, the compliance burden on businessperson has been eased out under the latest GST Amendment Bills,[3] which was initially pointed out as a disadvantage of the GST regime. Largely, majority of the people support GST for the success it has collected.[4]
Further, the absorption of varied indirect taxes into GST has allowed the Government to effectively grant input tax credit[5] [“ITC”] to the manufacturers and businesspersons involved in the supply chain that has led to reduction in tax liability. To illustrate it,
| Stages | Value Addition | Tax Rate | Tax Payable | Final Amount |
| A | 100 | 10% | 10 | 110 |
| B | 50 | 10% | 5 | 165 |
| C | 20 | 10% | 2 | 187 |
Under the earlier tax regime, the tax was to be paid at the total rate at which the output is being sold and not on value addition.
The benefits of ITC are not available to everyone in the market. The law provides for minimum conditions that a businessperson have to fulfil.[6] One such condition is that any businessperson, who is involved in the business of a GST exempted goods, is not eligible for claiming ITC.[7] This provision of law would prove to be instrumental towards the concluding part of this Article.
Along the news of successful implementation of GST over the past year came the news of exemption of sanitary napkins from GST.[8] Earlier, GST amount to 12% was levied on sanitary napkins. This development witnessed mixed response from the public. One Section of the society hailed the decision of the GST Council for their progressive outlook and freeing the necessity from the taxing process.[9] On the other hand, people have criticised such tax exemption.[10] I believe that the GST exemption has definitely reduced the cost of the product and therefore, cheering for the lower-priced product does not seem illogical. However, I moot through the course of this article that instead of GST exemption, the tax rate on the product should have been reduced to 5% as exemption brings negative implications on the domestic manufacturers along.
Mathematical dig on the Hypothesis
During the course of the following calculations, we shall be finding answers for two questions:
- Does GST exemption reduces the cost of the product?
- Does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest?
- Is GST exemption on sanitary napkins is a viable option to achieve such larger social interest?
A Sanitary Napkin [“output”] is a combination of four inputs:
- Cotton with a GST rate of 5%;
- Aseptic packing paper with a GST rate of 12%
- Packaging plastic sheet with a GST rate of 18%
- Advertisement with a GST rate of 18%.
These four inputs are assembled and synthesised together to derive the output. Generally, this industry only encompasses two level supply chain, i.e. one the first level, respective firms supply inputs to the output manufacturer; on the second level, the output manufacturer assembles the inputs to derive the output.
To begin with the search for the first question, i.e. does GST exemption reduces the cost of the product, we shall be finding the change, if any, in the cost of the product through calculating the cost of the product in the pre-GST exemption period and post-GST exemption period, wherein the product is produced by a domestic manufacturer.
Case 1: Domestic Manufacturer producing at 12% GST (ITC available)
Assume that the cost of each input be Rs. 100. Therefore, cumulative input cost be Rs. 400.
When such inputs are sold to the output manufacturer, total GST paid is:
- 5% of 100 (Cotton) = Rs. 5
- 12% of 100 (Aseptic packing paper) = Rs. 12
- 18% of 100 (Packing plastic sheet) = Rs. 18
- 18% of 100 (Advertisement) = Rs. 18
Therefore, TGP = 5+12+18+18 = Rs. 53
Now, assume that the value addition done by output manufacturer during assembling the inputs equals Rs. 47.
Therefore, total cost incurred by the output manufacturer equals Rs. 500.
Now, if he wishes to sell the product at a profit of 10%, i.e. Rs. 50, the final price [x] of product would be:
x = 500 (total cost) + 50 (profit) +12x/100 (GST on output) – 53 (ITC)
x = Rs. 565
Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 565 when the output is exempted from GST.
Case 2: Domestic Manufacturer producing with GST exemption (ITC not available)
If we borrow the costs from the above illustration,
Cumulative input cost = Rs. 400
Total tax paid = Rs. 53
Value Addition by the output manufacturer = Rs. 47
Therefore, total cost incurred by the output manufacturer = Rs. 500
Profit = Rs. 50
As there is no GST on the final output, the output manufacturer would not have to add the cost of GST in the final price of the output as well as he cannot claim the benefit of ITC.
Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 550 when the output is exempted from GST.
If we compare Case 1 and Case 2, it would be safe to conclude that price of the output has decreased when the output was exempted from GST regime. This answers the first question as well that yes, GST exemption reduces the cost of the product.
Moving on to the next question, i.e. does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest, we shall be finding the solution for this question by finding the costs incurred by the international manufacturers under the pre-GST exemption period and the post GST exemption period.
Case 3: International Manufacturer supplying at 12% GST
The international manufacturers would not be enjoying the benefits of ITC as they do not involve themselves into any manufacturing activity in India. They are merely exporting the final product and effecting its sale. Also, it is a reasonable presumption that international manufacturers would be exporting their products in India only when they find that the domestic products are priced higher than their products.
Therefore, assume that the total cost of the product after its import in India be Rs. 490 and that the seller expects 10% profit, i.e. Rs. 50 (approximately).
Thus, the price [x] at which the seller would be ready to sell the product will be:
x = 490 + 50 + 12x/100
x = Rs. 614
Therefore, we find that an international manufacturer would be ready to sell his output at the cost of Rs. 614. This also shows that in the pre-GST exemption period, the domestic manufacturers were able to price their output lower than the international product.
Case 4: International Manufacturer supplying during GST exemption regime
Assuming the same numbers,
Total Cost = Rs. 490
Profit = Rs. 50
Therefore, we find that an international manufacturer would be ready to sell his output at the cost of Rs. 540 when the output is exempted from GST.
If wer compare Case 2 with Case 4, we find that international manufacturers would be in a position of benefit during the GST exemption regime as their product would be priced lower than the product of the domestic producer. This answer the second question under inquiry that yes, GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest in the form of cheaper international products.
Moving on to the last question, i.e. is GST exemption on sanitary napkins is a viable option to achieve such larger social interest, we shall be finding the answer of this question in the tax slab present between GST exemption and 12% GST, i.e. 5% GST.
Case 5: Domestic Manufacturer producing at 5% GST (ITC available)
If the Government imposes 5% GST on the output, then the output manufacturer can enjoy the benefits of ITC.
Taking assistance from the aforementioned numbers,
Cumulative input cost = Rs. 400
Total tax paid = Rs. 53
Value Addition by the output manufacturer = Rs. 47
Therefore, total cost incurred by the output manufacturer = Rs. 500
Profit = Rs. 50
Derivation of the final price of the product is not that simple under 5% GST scenario because tax on inputs exceeds the tax on output and thus effectively, the output manufacturer need not pay anything for GST obligations. His entire tax liability has already been discharged while the tax on inputs was paid. To illustrate:
The final price [x] of the product = 500 + 50 + 5x/100 – 53
X = Rs. 523 (approximately)
Rs. 523 is lower than the price at which the manufacturer would be ready to sell the product. The minimum price he can offer is Rs 550 (total cost + profit). Therefore, the domestic output manufacturer would be selling the product at the price of Rs. 550. Therefore, we realise that if the GST were fixed at 5% for sanitary napkins, the domestic manufactures would be selling the product at the same rate at which they would sell it during the GST exemption regime.
Case 6: International Manufacturer supplying at 5% GST
Taking the assistance from the aforementioned numbers,
Total Cost = Rs. 490
Profit = Rs. 50
Final price [x] at which international manufacturers would be ready to sell is,
x = 490 + 50 + 5x/100
x = Rs. 568
Therefore, we realise that the international manufacturers would be ready to sell their product at the price of Rs. 568, which is higher than the price at which the domestic manufacturer would be ready to supply his product when the product envisages 5% GST.
This answers the third question that NO, GST exemption on sanitary napkins is not a viable option to achieve such larger social interest. Instead of GST exemption, the more viable option for the government would have been to impose a 5% GST on the sanitary napkins.
Conclusion
The above mathematical calculations suggests only one proposition that the Government has taken the decision in a hurry without the true inspection of the facts and economics involved. A thorough economic examination would have inculcated not only the demands for low-priced sanitary napkins but also secured the interests of the manufacturers. A policy decision to amuse the public by hurting the domestic manufacturers is not reasonable. An imposition of 5% GST would have balanced the interests of the both the players engaged in the market, i.e. consumers and manufacturers.
Apart from the policy check, this Article intends to draw two implications through the aforementioned six case studies:
- First, provided the taxes on input is more than the GST on output, then minimum GST on the output will be more beneficial to all the interest groups without having any negative implication on the consumer;
- Second, GST exemption can be provided for only those products that involves just two levels of firms. However, if GST exemption is provided for a product that requires a supply chain of more than two manufacturers, then the benefits of ITC would be unavailable to the manufacturers and the cascading effect of tax (tax on taxes) would re-emerge.
[1] Goods and Services tax formally launched in Parliament by Prime Minister Narendra Modi and President Pranab Mukherjee, The Hindu (Jul 1st, 2017, 01:14 IST) https://www.thehindu.com/business/Economy/live-goods-and-services-tax-launch/article19185917.ece.
[2] The advantages of GST: Take a look at benefits, The Economic Times (Aug 4th, 2016, 07:37 IST), https://economictimes.indiatimes.com/news/economy/policy/the-advantages-of-gst-take-a-look-at-benefits/articleshow/53514291.cms.
[3] Central GST (Amendment) Bill, 2018; Integrated GST (Amendment) Bill, 2018; The Union Territory GST (Amendment) Bill, 2018; GST (Compensation to States) Amendment Bill, 2018; Lok Sabha passes bills to amend GST laws, Livemint (Aug 9, 2018, 20:38 IST), https://www.livemint.com/Politics/B8uK5iDaRa8SIoYkbvo6nO/Lok-Sabha-passes-bills-to-amend-GST-laws.html.
[4] A big success of GST implementation is there has not been any inflation, The Economic Times (Jun 27, 2018, 07:47 IST), https://economictimes.indiatimes.com/news/economy/policy/a-big-success-of-gst-implementation-is-there-has-not-been-any-inflation-hasmukh-adhia/articleshow/64753864.cms; One year of GST: Indirect tax regime is a great success; has led to growth in GDP, Firstpost (Jun 29, 2018, 17:06 IST).
[5] Input tax credit signifies a scheme wherein subsequent manufacturers and businessperson in the supply chain can reduce their liability on selling the outputs by the tax amount that has already been paid on inputs. Simply put, subsequent manufacturers and businessperson need to pay tax only on value addition.
[6] Sections 16, The Central Goods and Services Tax Act, 2017; Section 36, Central Goods and Services Tax Rules, 2017.
[7] Section 17, The Central Goods and Services Tax Act, 2017; ITC Rules for Common Credit under GST, Cleartax (Jun 18, 2018, 17:09 IST), https://cleartax.in/s/itc-rules-for-common-credit-under-gst.
[8] Sanitary napkins to be exempt from GST, The Hindu (Jul 21, 2018, 18:25 IST), https://www.thehindu.com/business/Industry/sanitary-napkins-to-be-exempt-from-gst/article24483128.ece.
[9] Sanitary pads should never have ipbeen taxed in the first place, The Hindu (Jul 24, 2018, 15:24 IST), https://www.thehindu.com/life-and-style/gst-exemption-of-sanitary-pads-out-of-the-red/article24502781.ece.
[10] GST exemption on sanitary napkins offers no significant cost benefit to consumers: FICCI, Business Line (Aug 10, 2018), https://www.thehindubusinessline.com/economy/gst-exemption-on-sanitary-napkins-offers-no-significant-cost-benefit-to-consumers-ficci/article24658982.ece