Pharma industry deny allegations of GST evasion on hand sanitisers

Upset over allegations of GST evasions on the manufacturing and marketing of alcohol-based hand sanitisers, the pharma industry has requested that the Central Economic Intelligence Bureau (CEIB) should consult with the GST Council and provide urgent clarifications on this issue.  

Refuting charges of wrong classification of hand sanitisers, it claims that from 2017 (time of new GST regime) till now, hand sanitisers have been classified under HSN code 3004 with 12 per cent GST. However, the revenue department has never raised any objection to the said classification. Now, the revenue department is proposing a classification under heading 3808 which comes under 18 per cent tax rate. 

Industry associations have made representations to the GST Council as well as the Finance Ministry and other governing authorities stating that the charges of duty evasion levelled against the pharma industry are false.

For instance, the North Chapter of CII has written a letter to the Central Board of Indirect Taxes and Customs. It pointed out, “It is important to note that most of the industries manufacturing the hand sanitisers are registered under the Drugs and Cosmetics Act, 1940 and the said sanitisers come within the definition of ‘medicinal preparations’ i.e., under Section 2(g) of Drugs and Cosmetics Act, 1940. The interpretation regarding classification of goods must be construed in the sense in which persons who deal in such goods understand it normally. The goods must also be classified according to their popular meaning and commercial sense as well. It may be noted that in the past, anti-lice shampoo, as well as prickly heat powder, have also been held as medicaments while referring to their use, as the primary purpose of such goods (like hand sanitisers) is to prevent the disease.”

The letter also highlighted that the Ministry of Commerce and Industry, while prohibiting the export of alcohol-based hand sanitisers vide Notification No. 08/2015-2020 dated 01.06.2020, mentioned their ITC HS Codes as 3004, 3401, 3402 and 3808.

The association has requested the authorities to provide clarification regarding classification of hand sanitisers, after providing adequate opportunity to all the stakeholders. Its letter also requested, “The field formation may kindly comprehensively be directed not to adopt any coercive/aggressive investigations like visits and summoning, until such clarity is given by the CBIC, especially in view of the fact that up till spread of COVID-19, the department itself assessed the returns of the assessees considering the classification as 3004 attracting 12 per cent GST.”

Other stakeholders of the industry shared similar views with Express Pharma. 

BR Sikri, Chairman FOPE, and Vice President BDMA commented, “Hand sanitisers manufactured by pharma manufacturing facilities are to be treated like any other medicine in a GMP environment after getting a licence from the authority concerned in Form 25. Accordingly, manufacturers and marketers in the Indian pharma industry are using HSN Code 3004 with a tariff of 12 per cent. But, the government has opined that these manufacturers are wrongly classifying the said item, it needs to be classified under tariff heading 3808 which has an 18 per cent GST rate. This option is based on the classification of the World Customs Organisation (WCO) which opines that the correct classification of alcohol-based hand sanitisers is under head 3808 of HSN.”

He continued, “To overcome this ambiguity there is a need to interact with industry as well as with the experts of GST and other legal consultants instead of simply asking the industry to pay the difference between 12 per cent and 18 per cent. The industry has helped the nation by providing such a huge quantity of sanitisers at a time when it was needed. Suddenly imposing a financial burden will not create a good precedent. Every problem has a solution provided it is discussed and deliberated among stakeholders instead of taking onside action.”

Harish Jain, Secretary, Karnataka Drugs and Pharmaceutical Manufacturers Association too commented “In Karnataka, after the onset of COVID-19, to meet the shortage of hand sanitisers, the State Drugs Control Department granted manufacturing permissions to existing pharma manufacturers as well as distilleries under license in Form 25, classifying them as Drugs under Section 3(b) of Drugs & Cosmetics Act 1940. This was right since sanitisers are meant to prevent the disease. All pharma products for GST falls under HSN Code 3004 and hence, sanitisers manufactured under drug license in Form 25 are classified under HSN Code 3004. It has been accepted by the GST authorities from 2017.” 

He explained, “Accordingly, all the manufacturers across India have followed a similar pattern. Now, a circular dated June 10, 2020, from the Directorate General of GST Intelligence has come as a rude shock. I believe the use of hand sanitisers for prevention of COVID-19 in humans is an accepted fact and HSN Code 3004 is the most appropriate classification. However, if the authorities feel there is a dispute, then there can be a debate between industry and authorities. But, labelling the whole industry as tax evaders is a bit of a disappointment and discouraging. The pharma industry has risen to the occasion and in spite of all hardships caused due to lockdown, price control, harassment by legal metrology department etc., it has that ensured every citizen of the country has access to hand sanitisers as well as other drugs in a matter of a few weeks. It is time authorities trusted the industry, it is one of the most compliant and organised. They should sit across the table and sort out the issue quickly to avoid expensive, time-consuming litigations. “

Nipun Jain, Chairman, Small and Medium Pharma Manufacturers Association, highlighted, “Considering the pandemic situation in the country, the government allowed distilleries to start manufacturing hand sanitisers which helped in ensuring their uninterrupted supply. Although the pharma industry wasn’t in favour of giving further extension to distilleries to continue manufacturing hand sanitisers, understanding the pandemic situation and need of this product, the government allowed them to continue up to December 31, 2020. However, the industry feels that since sugar mills and distilleries are not making medicines, the GST department is correct in asking for 18 per cent GST. Whereas, in the case of pharma firms involved in making and marketing hand sanitisers, it should be taken into consideration that they have given manufacturing licenses under the Drugs and Cosmetics Act. Hence, it is treated as a drug and classified under 3004, which attracts 12 per cent GST.” There is no need to revisit that decision.”

Dr Rajesh Gupta, All India Head Laghu Udyog Bharati- Pharma Wing and President of Himachal Drug Manufacturers Association, said, “It is a lacuna on the part of the GST Department. We appeal to GST officials, to not penalise our industry for tax evasion due to this lacuna. The pharma industry is fully regulated and is already paying 18 per cent input GST.”

Cause for the furore 

A recently issued letter by Rajeev Kumar Singh, Additional Director, Directorate General of GST Intelligence (DGGI) to the Principal Chief Commissioner, Chief Commissioner, Central Goods and Service Tax (CGST) and Central Excise and Service Tax (CX) informed that as per intelligence by CEIB, manufacturers of alcohol-based hand sanitisers have been short paying the GST by misclassifying them under 3004 of the HSN code (applicable for 12 per cent). The department states that hand sanitisers should be classified under heading HSN code 3808 (applicable for 18 per cent). Authorities claim that this misclassification has resulted in substantial evasion of GST, reportedly to the tune of over Rs 50 crores.

Sources inform that DGGI has developed further data with the help of online shopping platforms like Amazon, Flipkart, Snapdeal, PayTm etc., and prepared a list of 62 manufacturers/ suppliers who have misclassified hand sanitisers under different brands.

It has come to light that the GST department has already started an aggressive investigation into the matter.  

The industry and regulators have locked horns over this issue.

Commenting on the whole issue, a representative member of Haryana, GST Council said, “It seems to be an interpretation issue. The GST calculation is based on the product tariff and whoever is labelling their hand sanitisers as disinfectants are liable to pay GST at 18 per cent. Some of the big players have already started paying it. However, if any firms/associations have any concerns/issues they can raise their points.”

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