“There are some remarks made by various column writers on GST rate on sanitary napkins. It may be mentioned that the tax incidence on this item before and after GST is the same or less.”, says the Press Release by the Govt, dated 10th of July, 21017.

The context of the press release being the raging issue of sanitary napkins being taxed at 18% GST. In the pre-GST period, concessional Excise Duty of  6% and 5% VAT got levied on the product.  Consequently, average tax rate of tax incidence came to 13.68%. The Govt has used this estimated pre-GST weighted average as comparison to the existing 12% GST.

The Press Release further provided break up of the Raw Material used as under:

Raw Materials used in Sanitary Napkins with 18% GST rate

• Super Absorbent Polymer
• Poly Ethylene Film
• Glue
• LLDPE– Packing Cover

Raw Materials used in sanitary napkins 12% GST rate

• Thermo Bonded Non-woven
• Release Paper
• Wood Pulp

“As raw materials for manufacture of sanitary napkins attract GST of 18% of 12%, even with 12% GST on sanitary napkins, there in an inversion in the GST structure. Though, within the existing GST law such accumulated ITC will be refunded, it will have associated financial costs [interest burden] and administrative cost, putting them at a dis-advantage vis-à-vis imports, which will also attract 12% IGST on their imports, with no additional financial costs on account of fund blockage and associated administrative cost of refunds. 

 If the GST rate on sanitary napkins were to be reduced from 12% to 5%, it will further accentuate the tax inversion and result in even higher accumulated ITC, with correspondingly higher finical costs on account of fund blockage and associated administrative cost of refunds, putting domestic manufacturers at even greater dis-advantage vis-à-vis imports.

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 make domestically manufactured sanitary napkins at a huge dis-advantage vis-à-vis imports, which will be zero rated.”

The explanation seems majorly satisfying though with few gaping loopholes-

• The Raw Materials primarily being used in sanitary napkins in “Cotton” which is subject to GST @ 5%. The Release conveniently chooses to avoid the same. Hence, when 70-80% of the raw materials to be used falls in a lower tax bracket of 5%, then, the Govt’s argument of “inversion” of tax rate might not hold ground.

• Secondly, in the pre-GST regime, most of the Indian states had exempted sanitary napkins from levy of VAT. Hence, effectively, only 6 % concessional Excise Duty would used to be levied.

Considering everything, it seems that there is still scope for further consideration. This being a mass utility product has to be treated prudentially. For example, 5 % GST rate can still be imposed considering effective input tax rates. Also, differential tax rates can also be used.

Click here to download the Press Release issued by the Govt.

 

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