The Goods and Services Tax Council on Saturday announced that it was reducing the tax rate on sanitary napkins from 12% to nil, prompting praise from all over the country. Those leading a campaign to keep sanitary napkins out of the tax net called it a major victory. Yet a few have raised questions about what the new rate will actually mean, and why the government had spent the last year arguing that a lower tax rate would be a bad thing.

The announcement on sanitary pads was made along with changes to the tax rates for a number of items, including washing machines, vacuum cleaners and televisions, prompting analysts to call the decision a move to woo the middle classes ahead of next year’s general elections.

Jaitley’s arguments

But some did point out the rather inconvenient fact that the government had taken the exact opposite view on the issue. Here is former Finance Minister Arun Jaitley making the argument against lowering the tax rate on sanitary napkins in a video uploaded by the Bharatiya Janata Party:

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In July 2017, the government even put out a press release explaining this position. Jaitley, and the press release, made the following argument: Before GST, sanitary napkins were effectively taxed at more than 13%, and they had been brought down to 12% under GST.

Crucially, to understand the argument, one has to grasp the concept of input tax credits. Under the GST, a trader pays tax at every stage of the process. For a sanitary pad manufacturer, for example, that would mean paying tax while buying the raw materials, and then paying tax again when selling the product. To counteract this double taxation, the government refunds the entire tax paid on the input – meaning the raw materials – as long as the producer has paid the output tax.

Jaitley argued that making the tax rate nil would mean local manufacturers would no longer be able to get input tax credits. This means they would be taxed while buying the raw material, and had no option of getting back that money when they sold. Foreign manufacturers, however, would not be subject to input taxes and will also not have to pay any GST, putting them at a massive advantage.

Or, as Jaitley said, “If you did away with that 12% and brought that down, you probably won’t have any Indian manufacturer left, it will be only the Chinese products which will be sold in the Indian market.”

‘Thank you Modi’?

Despite this, Jaitley’s successor in the finance ministry, Piyush Goyal, has gone ahead and done just that. It seems like the BJP has begun a campaign also to thank Modi for the move.

Despite the praise, some are even arguing that the prices of sanitary napkins will actually go up after this move since local manufacturers, who have to pay input taxes but do not get any input credit, will increase their prices. This was also the argument of many who had supported the government’s position until now.

A few others have said that though the prices will not go higher, the change is unlikely to lower them tremendously either:

According to the Indian Express, Piyush Goyal was asked about this: “When asked, Goyal said calculations showed that input tax credit on sanitary napkins was about 3-4 per cent, and the government would ensure a lower price for the end product.”

What seems to be unclear is how the exemption for sanitary napkins will actually work. If the sanitary napkins are technically under GST, but taxed at 0%, manufacturers will still be able to get input tax credits.

If the product is entirely exempt from GST, then manufacturers will not be able to get any input tax credit. And the government will have to explain what changed in its thinking, and why this move will not cause the market to be flooded by Chinese goods.

As of now it is unclear what the changes actually mean for the price of sanitary napkins, and for domestic and foreign manufacturers. What is clear is that, after a year of arguing rather vehemently against this idea, the government seems to have changed its mind.