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July 9, 2020

GST Intelligence to check into Tax Evasion by hand sanitizer manufacturers

GST Intelligence to check into Tax Evasion by hand sanitizer manufacturers

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 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.

Is GST applicable on hand sanitizers?

Hand washes and sanitizers fall under HSN Code 3808 – Disinfectants and hand sanitizers on which GST is charged at 18%.

Apetition was filed before the Supreme Court seeking exemption for face masks and hand sanitizers from Goods and Services Tax. The Apex Court on April 21, 2020, dismissed the said Public Interest Litigation. Another petition was also dismissed which sought that the Centre and State Governments provide relaxation on medical expenses related to non-COVID-19 treatments, amidst the widespread coronavirus pandemic.

In the wake of the increasing threat of Covid-19, the medical fraternity has asked the government to consider withdrawing GST on hand sanitiser and masks in these difficult times. Hospitals, ambulance, nursing and support staff desperately require sanitisers, masks and other protective equipment in 24×7 in bulk. Besides, medical practitioners and public at large also require hand sanitisers and masks as a major preventive measure to keep away from the highly infectious virus. It would be a big relief for people if GST was not levied on these items. However, no such exemption from GST was provided by the government.

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Tax Evasion by Hand Sanitizer Manufacturers

Hand sanitiser 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 sanitiser manufacturers and the government. Due to mis-classification of hand Sanitisers (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) has issued a letter to principal chief commissioner/chief commissioner to check evasion of GST by manufacturers of alcohol-based hand sanitisers. The DGGI has alleged that the mis-classification has led to “substantial evasion” of tax. Authorities have analysed data for 62 manufacturers with the help of online shopping platforms like Amazon, Flipkart, Snapdeal, PayTm, etc. and have asked field offices to verify if other producers, including distilleries and sugar mills, have also “mis-classified” the product that is being used across offices and households.

It was argued that hand sanitisers are classified as “drugs” as the manufacturers obtain a ‘drug manufacturing license’. It is also contended that the product is 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 Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale” Such medicaments are chargeable with GST @12%.”

Categorising Alcohol Based Hand Sanitizers by sugar mills and distilleries as a pharma product seems a little absurd.

DGGI first did a few operations against many units and after finding major irregularities, DGGI then sensitised 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 sanitiser manufacturers across India, according to government sources.

This has given GST inspectors and officers a reason to conduct “surprise visits”, armed with search warrants, industry bodies have complained. The Association of Indian Medical Device Industry has petitioned finance minister Nirmala Sitharaman to stop the inspections, arguing that it is causing harassment.

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.

GST intelligence officers arrest promoters of Bhopal-based SOM Distilleries after alleged tax evasion of nearly Rs 8 crore in supply and sale of alcohol-based hand sanitiser was detected: Officials

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