GST rates and the medical devices industry

Let us use the GST rate regime to build up a strong domestic industry in sectors like pharmaceuticals and medical devices that can play to our strengths in labour-intensive production

The Covid-19 crisis has highlighted the need to strengthen our public health system, especially at the primary level. In addition, we need to create strong domestic manufacturing capacities in industries such as pharmaceuticals (especially APIs or active pharmaceutical ingredients going into important formulations) and in the medical devices segment (largely falling under chapter 90 of the International Trade Classification).

The medical devices industry is important for the country for it plays to our strengths. Frugal engineering and interesting innovations have happened in India which make it possible to manufacture medical devices here at a fraction of the cost of imported equipment. The Covid-19 crisis has also highlighted the point that domestic capacities are not adequate to meet a crisis demand.
 

How do we then balance the twin objectives of meeting domestic demand and ensuring that the domestic medical industry is not swamped by imports? Here, policymakers must make the important distinction between short-term responses and a medium/long-term strategy.

In the short run, we need to bring down the cost of equipment for emergency supplies that are pouring in. Most of this is imported on a government-to-government (G2G) basis like the recent import of testing kits from China. For this, the government has already brought down the custom duty rate and waived the levy of health cess. This exemption has been given for a limited period, up to September 2020. This will also help the private importers who seek to deploy their CSR funds for the import and distribution of medical equipment. The custom duty reduction is temporary and correctly so.

In the medium or long run, there is merit in considering custom duty rationalisation for critical components and intermediate inputs going into the production of medical equipment in India. The focus could be on such critical components that are not made in India but are vital for the industry.

On the goods and services tax (GST) side, any change has its pros and cons. Any rationalisation needs to be considered while balancing the conflicting need for promoting Indian investments in manufacturing. Further, the lowering of GST rates would not benefit the domestic manufacturer — if it is too low, it will lead to an inverted duty structure creating blockages while availing of input duty credits leading to demands for refunds. Compliance issue would then come to the forefront.

The other dimension is that any reduction in GST rate immediately hurts state revenues which are already under stress. Keeping all this in view, the GST rate rationalisation on medical devices must be taken up as part of a comprehensive rate rationalisation exercise. Perhaps at that time we could think of one uniform GST rate for all medical devices. Today the industry is bedeviled with a multiplicity of rates — 5 per cent, 12 per cent and 18 per cent. The GST rates must also be pegged at a level where there are no blockages of input duty credit through an inverted duty structure. Perhaps we could have a rate of 10 per cent if the 5 per cent and 12 per cent GST slab are merged at some point in time.
 

The nub of the argument is that the GST rate rationalisation has to be an instrument for a medium-term strategy not a short-term response. There is too much at stake for it to be used for resolving the Covid-19 crisis. The custom duty changes have already adequately addressed that.

In conclusion, when the dust settles, let us strategise on how we can use the GST rate regime to build up a strong domestic industry in sectors like pharmaceuticals, medical devices and consumer electronics which can play to our strengths of scientific competence and labour-intensive production. Further to the rate rationalisation, schemes incentivising and promoting production in India should also be considered.

The author is a retired CBEC member & currently the national leader of tax and economic policy group, EY India

Views expressed are personal