MAY 07, 2021

By Dr Gaurav Gupta, Adv. & Rakesh Chitkara, Adv.

WITH the present position of Corona pandemic in India, demand of medical oxygen is rising everywhere and the demand for exemption on supply of medical oxygen is also being demanded by many. Government has exempted Basic customs duty on import of COVID-19 vaccines, and the Basic customs duty and health cess on import of medical grade oxygen and other equipment related to providing oxygen to patients, for a period of three months till July 31, 2021 [Notification 28/2021-Cus refers]. IGST on these goods is also fully exempt under  AD HOC EXEMPTION ORDER NO. 4/2021-CUSTOMS dt. 3.5.2021 provided the conditions mentioned therein are satisfied.

Generally, Oxygen is manufactured by the following methods:

a. The first process is cryogenic distillation wherein air is liquified and cooled in air separation plants and the oxygen is distilled based on its boiling point.

b. Oxygen can also be generated directly for patient by a machine called an oxygen concentrator.

c. Oxygen can also be produced by pressure swing absorption (PSA) plants. In this plant, oxygen is produced as a remaining product when nitrogen concentrates and is absorbed in the pore system of the Zeolite Molecular Sieve from the concentrated air.

The investment for setting up an oxygen manufacturing facility varies from Rupees 5 Crore to Rupees 50 Crore. The variation is on account of size of the plant, location of the plant, type of the plant, etc. Without taking land cost into consideration, a plant that can supply 24 cylinders (which is a small capacity as oxygen is being used in a number of activities daily) worth of gas per day costs about Rs 33 lakh to set up. Thus, there is a considerable investment required in plant and machinery cost to run a commercially viable manufacturing plant. The investment is further required in oxygen cylinders and other consumables (considering air as free). One must note that every investment, whether in plant and machinery or other fixed assets or consumables and other working capital items (including services like labour contractor) would be taxable under GST and such GST so charged to the oxygen manufacturing plants would be available to manufacturer as Input Tax Credit. Such manufacturer utilises the Input Tax for payment of his output GST liability and thus, such element of GST paid on his purchases does not form part of his cost.

The exemption is demanded with the basic presumption that when the GST is gone, the product becomes cheaper by so much of the amount. However, this is a myth. Having discussed the process, it is important to understand that what are the implications of providing exemption to oxygen in the country. The following implications shall impact a manufacturer if Oxygen is exempted:

a. The supplier (of oxygen) cannot charge GST on his output product and thus, there is no output tax on his product.

b. Once output product is exempted, the Input Tax (GST) paid on the purchases and setting up of plant shall become part of cost and shall not be available for any other use. Thus, the manufacturer adds such GST as paid on his purchases in his cost and retaining the same margin, his selling price before tax to the consumer goes up. Thus, the whole idea that removal of output cost would bring down the consumer cost is countered by the increased in manufacturing cost on addition of such GST paid on purchases. Thus, if Rs. 300 (presumptive) is the output tax and Rs. 230 (presumptive) was the input cost, the benefit to the consumer would not be Rs. 300 but Rs. 70.

c. The compliance of such reversal of Input Tax Credit increases (as he may be supplying other taxable supplies also) on supplier and he has to maintain more segregated records, reversal of Input Tax Credit records etc. This is usually taken as enhanced cost and added to his output price.

d. It has also been seen in the past that the suppliers who set up new units are not happy with exemption as they are sitting on huge input tax credit on their plant and other fixed assets. Such suppliers usually add their Input Tax towards their costs and try to recover such costs in short term, thereby increasing price to customer. The precedent was seen in case of restaurant suppliers and builders who were not happy with the exemption and customers were also complaining that such suppliers have not decreased their costs (customers found that there is either nil or only marginal reduction in their total purchase price despite drop in the GST rate from 18 to 5% / 1%). It is also found that suppliers often pocket such benefit and do not pass the benefit to the ultimate customer (since customers are ready to buy oxygen at this time even at enhanced price). In normal times also, since benefit is not reaching the final customers, a lot of complaints pile up before National Anti-Profiteering Authority. The need of nation succumbs to greed of few and benevolence of government in terms of giving such exemption does not reach the rightful consumers.

e. Finally, the exemption would require a consensus from GST Council which is a body consisting of Centre and Finance Ministers of all states. Since this is a body of elected leaders, I don't think they will deny such exemption considering the public consensus.

Our humble view on the issues is that benefit to ultimate consumer would come not merely from an exemption, but from the benevolence of a trade category. If the Oxygen manufacture and trader associations want, they should come forward and represent before the government that they would extend full support in terms of controlling prices of oxygen supply and in case they feel that such exemption would lead to fall in prices to ultimate customers (considering Input tax computation) the exemption demand should be made by them. Even if the exemption is given but the prices to ultimate consumer is not dropped by such suppliers, the tax benefit would, rather than going to consumer would add into the profits of such suppliers. The discipline of the suppliers of the product can save a nation and not mere exemption. There are angels disguised as men who are supplying free oxygen, food etc. to the people struck with this deadly virus, yet there is another set of people who are profiteering from the rising demand of products. May God bless us all with good sense and humanity and help us sail through these tough times.

[The views expressed are strictly personal.]