Are ayurvedic sanitizers taxable at 18% or 12% GST?
The COVID 19 Pandemic has been severely disruptive to human life as well as the economy. However, the healthcare sector is expected to generate the maximum revenue, owing to the outbreak of the COVID-19, which has increased the application.
The healthcare sector has always been one of the key contributors to the global hand sanitizer market. Sales of hand sanitizers and similar products have swelled across several international markets since the COVID-19 outbreak began in January. Demand for hand sanitizer is surging around the globe as the new coronavirus spreads, prompting retailers to ration supplies and online vendors to hike prices.
Hand sanitizers are primarily sold through retail distribution channels such as supermarkets and hypermarkets, departmental stores, retail stores, and drug stores worldwide.
Tax Evasion by Hand Sanitizer Manufacturers
Hand sanitizer is the latest product where there is a GST dispute due to classification of the product in different slab rates.Multiple GST rates have now become a subject of issue between hand sanitizer manufacturers and the government.
Due to mis-classification of hand Sanitizers (alcohol based), sugar mills and distilleries were filing tax under tariff heading 3004 (12% GST) by wrongly classifying them as “medicaments” instead of “disinfectants” under heading 3808 (18% GST).
The Directorate General of Revenue Intelligence (DGGI) had alleged that the mis-classification has led to “substantial evasion” of tax.
It was argued that hand sanitisers were classified as “drugs” as the manufacturers obtained a ‘drug manufacturing license’. It was also contended that the product was used by medical professionals to sanitise their skin before a surgery and for cleaning wounds and has pharmaceutically active ingredients that have both therapeutic and prophylactic value. The trade body had argued its case against the classification of sanitizers as disinfectants.
HSN Code 3004 pertains to “Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale, including Ayurvedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale”Such medicaments are chargeable with GST @12%.”
Categorizing Alcohol Based Hand Sanitizers by sugar mills and distilleries as a pharma productseemeda little absurd.DGGI first did a few operations against many units and after finding major irregularities, DGGI then sensitized the CGST field formations.
It is difficult to guess total amount of evasion so far, but it is estimated to be substantial. The GST intelligence wing will check tax evasions by hand sanitizer manufacturers across India, according to government sources.
Such a mis-classification is often used as a common modus operandi for evading taxes which leads to massive revenue loss of the Government. Many countries have maximum 1-2 rates under their indirect tax regime. However as multiple rates are covered under GST, such issues are bound to arise.
Let us refer to the judgement of the Punjab and Haryana High Court in the case of Haryana Ayurvedic Drugs Manufacturers Association vs CGST& Ors where the issue raised was whether Ayurvedic Sanitizers are taxable @12% or 18%.
Facts of the Case
- The Petitioner, Haryana Ayurvedic Drugs Manufacturers Association had petitioned to quash the notices issued by the Taxation authorities to the manufacturers of the “AUS ingredients bases sanitizer” for depositing the GST at the Tariff Rate of 18% under the HS Coder 3808-94 instead of 12%.
- The controversy regarding levy of GST on sanitizers is primarily concerned with two Tariff Headings—3808 and 3004.
- The former relates to disinfectants, apart from insecticides, herbicides, plant-growth regulators, etc. and attracts the GST rate of 18%, while the latter relates to Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic uses and attracts the GST rate of 12%.
- Petitioner argued that the impugned notices were wrongly issued by the respondent-authority by misclassifying the same as “alcohol-based sanitizer”, whereas the sanitizers being manufactured by them are Ayurvedic/ Unani/ Sidha (AUS) ingredient-based sanitizers and thus different from alcohol-based sanitizers.
- It was further argued that the sanitizers manufactured by them came within the 12% GST bracket and not 18% as levied by the authorities.
Contention of High Court
The High Court forwarded the application to GST Council for appropriate consideration of exact GST rate applicable on Ayurvedic/ Unani/ Sidha (AUS) ingredient-based sanitizers in accordance with law.
Accordingly, the petition was disposed of with the hope that the same shall be taken up for consideration by the Council at the earliest, considering the issue involved.
GST Rate on Alcohol based hand sanitizers
- The Goa-bench of the GST-Authority for Advance Rulings (AAR) had ruled that Alcohol based hand sanitizers attract a GST of 18% in the advance ruling sought by Springfields (India) Distilleries.
- AAR is of the opinion that ‘hand sanitizers’ manufactured by the applicant are of the category of alcohol-based hand sanitizers and are classifiable under Head 3808 of HSN to which GST rate applicable is 18%
- As far as exempting ‘hand sanitizers’ due to notification passed by The Ministry of Consumer Affairs, Food and Public Distribution, claiming the same as an essential commodity is concerned, AAR was of the view that exempted goods are covered by Notification 2/2017 – Central Tax (Rate) dated 28/06/2019.
- Merely classifying any goods as an essential commodity will not be the criteria for exempting goods from GST
- As ‘hand sanitizers’ are not covered under Notification 2/2017 – Central Tax (Rate) dated 28/06/2019, the same will not be exempted under GST.
Therefore, the Goa AAR ruled that alcohol-based hand sanitizers manufactured by the applicant are covered under HSN Head 3808: Disinfectants and hand sanitizers on which GST is charged at 18%.
So as per the ruling of Goa AAR even though alcohol-based sanitizers are taxed @18%, GST rate applicable on Ayurvedic/ Unani/ Sidha (AUS) ingredient-based sanitizersare hoped to be decided by Council at the earliest.