Thread by @ideepakjoshi

A contrarian & unpopular view: The petition is based on a misconceived notion that exemption from GST will result in reduction of price. This is not how GST works. It will have a totally contrary effect of making the drugs costly. How?

Here's the answer 🧵:

https://twitter.com/manuvichar/status/1387762984332713988

Price of any product/service is based on cost of input goods/services. Many of these inputs are taxed under GST. This tax which the drug manufacturers pay is treated as their input tax credit. This is 'credit' only coz it's adjustable against the final GST on output. (1/n)

In fact, the whole value chain suffers ITC only to be adjusted against the subsequent final GST at each level of the chain. Hence, due to final GST liability, the ITC is not a cost component in the good/service. The prices remain low owing to this important factor. (2/n)

Seamless flow of ITC across value chain keeps the price low for end user. However, if there is no GST or good/service is exempt from GST, this input GST can't be set off as there is nothing to set it off against! ITC becomes cost & price rises correspondingly! (3/n)

In other words, unadjusted ITC is a biz cost for entities & thus is loaded in the cost of final output. If ITC on input was 10/-, then this 10/- is added to the cost coz of the exemption on final good. If GST is 12/-, then 10/- ITC is adjusted, reducing cost. (4/n)

There are 2 solutions, which unfortunately are not prayed for in the petition:
1. make subject drugs zero rated (that ensures GST rate is 0%, hence ITC is still available), or
2. make the entire value chain GST exempt (difficult policy change)

(5/n)

Well intentioned but ad hoc petitions will do more harm than good, unless the Govt. itself takes a structural policy decision. Will impact MSMEs also who can't bear the costing. Value chain taxation policy needs to be changed. But not through a writ of the court. (6/6)

Also the reliance on section 11, CGST Act is over-emphasised. There have been 100s of goods/services which have been exempted from GST u/s 11 in a routine manner. GST Council takes the call. Economic Adviser had once stated that healthcare needs to be within GST due to ITC issues