The Goods and Services Tax (GST) regime has made manufacturing condoms in India more expensive and exposed the country to cheap, low-quality imports, according to industry players.
“The import of condoms has become cheaper than manufacturing them in India for two reasons,” a senior official in a major condom company said on the condition of anonymity. “The first is of course the fact that manufacturing in India has become more expensive [after GST] but also because China has begun exporting very cheap condoms.”
“The danger here is that there is no telling the quality of these [Chinese] condoms, and often they are very poor[in quality], because they are not being put through the same quality standards as the industry across the world requires,” the official added.
The problem arises from the way the GST is structured. At present, every taxable good sold can avail of input credits for the materials and services used to create the final product. This system of input tax credits does not extend to items that are exempt from GST. These include condoms.
“There could be a situation due to this where the import of exempted goods becomes cheaper, but domestic industry gets a cushion to the extent of basic customs duty, which does provide a level-playing field to some extent,” Pratik Jain, leader, indirect tax, PwC India, said.
“Imports of condom are subject to basic customs duty as previously,” Unnikrishnan S.M., associate vice president of corporate strategy at HLL Lifecare which makesf Moods condoms, told The Hindu in an emailed response to questions. “The real challenge would be in ensuring the quality of condoms being imported. The Indian condom industry has adequate capacity to cater to the demands of the market.
“This is the case for all exempt goods, they cannot avail of input credits,” Archit Gupta, Founder of ClearTax.com. “This could make manufacturing in India more expensive, especially for goods whose inputs have become more expensive under GST.
“Since full input tax credit is not available for this product, the cost of production will be high in the GST regime and will adversely affect the margins,” Mr.Unnikrishnan added. “The situation can be saved if condom manufactures are allowed to take input tax credit since output tax is zero.”
Durex India declined to comment when contacted by The Hindu.
Tax on rubber
The GST Council has decided to tax natural rubber at 5% and synthetic rubber at 18%, something the All India Rubber Industries Association has protested saying that this tax burden was higher than what existed before GST. Rubber-based latex is a major input in condoms.
However, the predicament faced by the manufacturers of exempt goods is one of the main reasons why the government has chosen to instead levy a tax on some products. “It is precisely due to this breaking of the chain of input credits that the government tried to exempt as few items as possible,” Mr. Jain said. “If the industry wants to avail of input tax credits, then they could maybe petition the government for a concessional tax rate of 5%.”
This is the argument the government had made earlier this month regarding the tax rate on another sensitive and essential item —sanitary napkins.
“Reducing the GST rate on sanitary napkins to nil will, however, result in complete denial of ITC (input tax credits) to domestic manufacturers of sanitary napkins and zero rating imports,” the Finance Ministry said in a statement following outrage in certain circles over the 12% GST rate on the napkins. “This will make domestically manufactured sanitary napkins at a huge dis-advantage vis-à-vis imports, which will be zero rated.”
