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Taxes are an integral part of our day to day living. We all pay taxes when we buy different goods and services and some of us also pay taxes on the income we earn if it happens to fall in the taxable income bracket. But just because it is part of our lives does not mean that we necessarily engage with issues of taxation seriously. This perhaps can be seen from the fact that a large number of misconceptions abound on the issue of taxes. One very commonly held misconception, for instance, is that it’s the middle class, in particular those who pay income taxes, that bear the maximum burden of taxes. This misconception arises because many do not realise that even the poorest of the poor pay taxes for the goods and services they consume. Or for that matter, that a major proportion of taxes in India are generated through taxes levied on goods and services and only a small proportion is accounted for by taxes on individual incomes. Misconceptions like these, of course, may not be harmful as long as no demands are made to alter taxation based on such misconceptions.

But when demands are made based on misconceptions about how taxes work, they might even backfire instead of leading to an outcome envisaged by well-intentioned protestors.

This is best exemplified by the impact of the demand raised by individuals and organisations across the country, including women organisations, to reduce taxes levied on sanitary napkins under the Goods and Services Tax (GST). Many protested that if bindi, sindoor and kajal, can be kept out of the ambit of GST, there is no reason why sanitary napkins, an essential item for the hygiene and health of women, cannot also be exempted from GST. A petitioner even filed a case in the Delhi High Court, in the belief that her fight is for the benefit of women, particularly for those belonging to the lower economic strata of the society’.

A year later, the government capitulated and moved sanitary napkins from the 12 per cent GST rate category to the exempted category. The move, however, has not resulted in major benefits that many expected, and may even adversely affect women belonging to the lower income groups.

The demand made in this case seems to have been based on the misconception that a reduction in tax rates imposed on goods and services inevitably leads to a decline in their prices. As economists know, since taxes form only a part of the total cost of producing a good or a service, a decline in tax rates alone may not help lower prices significantly. In fact, if for any reason the cost of production rises, prices are unlikely to go down significantly despite a large enough reduction in tax rates.

In the case of GST on sanitary napkins this is what seems to have happened. One of the main features of GST is that it provides credit for taxes paid on inputs or what is known as Input Tax Credit (ITC). The idea behind ITC is that taxes that have been paid on inputs used in the process of production can be set off against the taxes that an enterprise needs to deposit when selling its final output. This provision however is not allowed for items exempted from GST. Moving sanitary napkins to the exempted category means that local manufacturers can no longer claim credits for the taxes paid on buying raw material, a benefit they could avail when sanitary napkins were taxed under GST.

Media reports show that on an average sanitary napkin manufacturers were able to claim up to 10 per cent ITC. While being exempted from GST means that local manufacturers do not pay 12 per cent tax, it also means that they no longer get the 10 per cent ITC. As a result, the taxes paid on the inputs would add to the cost of production, with little chances of any significant reduction in final prices.

This is exactly what has happened in most cases. If at all sanitary napkin prices have been reduced, it has been by a minimal amount and has been done mainly by the larger manufacturers. While larger domestic manufacturers, most of which are multinational companies (MNCs), have the means and ability to absorb this increase in cost, smaller manufacturers do not have the room to cut prices. Smaller manufacturers, including those that make low-cost sanitary napkins, pay GST for domestic inputs as well as basic customs duty of 10 per cent on raw materials like glue, wood pulp and super absorbent polymers sourced from abroad. The complete denial of ITC means that the net benefit of a reduction from 12 per cent to ‘nil’ tax rate is very small. As a result, smaller manufacturers do not gain from the move.

The move however, can result in significant gains for foreign manufactured sanitary napkins as these tend to be much cheaper. With zero GST, imported sanitary napkins will not invite Integrated GST (IGST) either. Importers will only have to bear the customs duty of 10 per cent, effectively reducing their tax burden from 22 per cent tax (IGST of 12% plus customs duty of 10%) to 10 per cent. This reduction in the tax levied on imported napkins, puts domestic manufacturers at a substantial disadvantage. The populist move bereft of economic logic, therefore, is likely to adversely impact the domestic industry. In fact, cheaper imports may end up hitting the smaller manufacturers, including women self-help groups that make low-cost sanitary napkins, much more than the MNCs who can always bring in cheaper imports from its facility in some other country, rather than producing locally.

In short, because the demand raised was based on misconceptions about how taxes work, it brings with it several adverse impacts and little pro-women benefits.

The views expressed in this piece are those of the author, and don’t necessarily reflect the position of CBGA. You can reach Malini Chakravarty at malini@cbgaindia.org.