On 21 July, the Goods and Services Tax (GST) Council decided to change the GST rate on sanitary napkins from 12% to zero. The decision is a complete U-turn from the earlier stance taken by the government in response to the demand for exempting sanitary napkins from GST.
Speaking at the Hindustan Times Leadership Summit in November 2017, Union minister Arun Jaitley had given two arguments against exempting sanitary napkins from GST. Because inputs used in manufacturing sanitary napkins were taxed at 12% or 18%, while the final product was taxed at 12%, effective taxation on the product had become lower compared to the pre-GST effective rate of 13.68%, Jaitley argued. This is because manufacturers are entitled to claiming input tax credit (ITC) under the GST regime. Jaitley also argued that the removal of GST on sanitary napkins would also entail removal of integrated GST on imports, giving an unfair advantage to imports from China, especially against small-scale domestic manufacturers of the product.
An earlier press release by the ministry of finance had also made a similar point. “Reducing the GST rate on sanitary napkins to Nil, will however, result in complete denial of ITC to domestic manufacturers of sanitary napkins and zero rating imports. This will put domestically manufactured sanitary napkins at a huge disadvantage vis-à-vis imports, which will be zero rated,” the release said.
How will the government’s present decision to exempt sanitary napkins from GST impact prices and production?
The effect on prices is difficult to predict. Sachin Menon, national head of indirect taxes at KPMG India, said that the price effect of being exempted from GST will depend on the value addition component and tax rates on inputs used in the manufacturing of sanitary napkins.
A hypothetical example given in the table above can help understand why this will be the case.
The table shows two scenarios with different tax rates on inputs and different value addition component in manufacture of sanitary napkins, which used to have a GST rate of 12%. Exempting a product from GST will not lead to an equivalent reduction in the cost of the product because the manufacturer will not be eligible to receive ITC once the final product’s GST has been waived.
Row 7 in the table shows the final price of the sanitary napkin in a 12% GST regime, assuming the manufacturer deducts the entire ITC from the final price, and row 6 shows the prices in a zero GST regime where the ITC deduction is not available to the manufacturer.
As can be seen from row 8, although prices fall in both cases after GST exemption, the magnitude is significantly different. To be sure, things could be very different in the real world, where two-three large companies such as Procter & Gamble and Johnson & Johnson control a huge share of the Indian market. If the companies decide to collude, they might be successful in withholding the benefits of exemption from GST rates. Yet another possibility could be a face-off between the government and companies due to such behaviour leading to allegations of profiteering.
While the jury on how GST exemption will affect the prices of sanitary napkins is still out, there is more clarity on other things. Unless the government decides to increase tariffs on sanitary napkins to compensate for the effect of integrated GST becoming zero, imports will gain in competitiveness by the amount of per unit ITC forgone by domestic manufacturers.
According to World Bank data, average annual sanitary napkin imports into India from China were to the tune of $ 31.6 million between 2012 and 2016. China’s average annual sanitary napkin exports to the world during this period were valued at $1.4 billion. This suggests that China has the ability to exploit the Indian market in case the present policy change makes imports more competitive. A tariff increase at the current juncture – when there is a looming threat of a global trade war — might trigger other unforeseen actions by India’s trade partners.
Another fact worth highlighting is that the policy might end up benefitting the bigger companies more than small scale units and self-help groups making sanitary napkins. This is because units with a turnover below ?20 lakh were anyway exempted from paying GST on their products. These will now have to compete with the bigger manufacturers who will most likely see a decline in their tax liability.
The upshot is, while exempting sanitary napkins from GST might help the government in gaining some support among consumers via lower prices, these gains might come at the cost of hurting the interest of domestic manufacturers, especially small-scale producers. The fact that the government has changed its earlier position on the issue is proof that its political economy priorities are changing as the elections come closer.
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