If the GST Council’s aim was to tax a certain section of patients who could afford pricier rooms, the levy is mis-directed
The Goods and Services Tax (GST) Council’s recommendation on June 28 for a 5 per cent levy without input tax credit on non-ICU hospital rooms above Rs 5,000, marks the first time that healthcare services will be taxed in the country. The GST Council’s recommendation, driven by a compulsion to increase collections from direct taxes across sectors, has predictably drawn protests from healthcare providers. The move is due to take effect on July 18 and a consortia of industry associations spanning AHPI, ASSOCHAM, FICCI, IMA and NATHEALTH, has shot off a detailed note to the Finance Minister Nirmala Sitharaman, listing the reasons why the GST Council’s recommendation is “contrary to the very spirit and objectives set by government to provide affordable healthcare services to population at large.”
The note reasons that since healthcare per se has been kept out of GST purview and the hospital bed is very much an integral part of this CARE, it therefore is reasonable that room charges should not be brought under GST purview.
The note also lists recommendations, ranging from no GST being levied across the spectrum of health, to providing a 0 rated or one per cent rate of output GST to all of healthcare so that hospitals can avail input credit and the benefits can be passed on to patients.
The note also reminds the Finance Minister not to compare healthcare services to other service sectors, as it saves lives and a “patient who is sick does not come willfully to the hospital.”
In a statement, President of NATHEALTH Dr Shravan Subramanyam, Managing Director, Wipro GE Healthcare pointed out that this is an additional GST burden on consumers who seek quality healthcare providers in non-ICU settings. He explains,”By not allowing input credit, government is breaking the chain of credit and not allowing any offset for the near 6 per cent embedded GST burden on healthcare sector which would have allowed quality healthcare footprint to expand.”
Dr Subramanyam recommended that this issue can only be addressed by putting a nominal output GST on core health services and reduction of GST input slabs on healthcare input items to unlock the large embedded taxes in healthcare delivery making quality healthcare more accessible, safe and affordable across the nation.
As the order specifies that there will be no input tax credit, the levy will pass on to to patients and will add to the general inflationary pressure on patients and their caregivers. Unlike opting for higher pricer hotel rooms, a higher priced hospital room is not a luxury but a necessity, dictated by treatment regimes.
Thus if the GST Council’s aim was to tax a certain section of patients who could afford pricier rooms, the levy is mis-directed. As the note explains, many tertiary/quaternary care treatments like organ transplants, bone marrow procedures, even COVID cases, need isolation for patient safety and therefore, patients will have to be kept in private rooms. Unfortunately, these cases often call for prolonged hospitalisation, adding to the burden on patients.
The note also asks whether this levy is applicable for patients in High Dependency Units, which function like step-down ICUs for patients who may recover from the ICU but still require constant monitoring in the ward till complete recovery.
Worse, as the note points out, insurance companies can set off the GST against GST collected on the insurance premium, the burden of the 5 per cent tax is going to be borne by cash paying patients who are more likely to be poorer than insured patients.
A recent NATHEALTH-EY study on embedded taxes in the healthcare sector mentions that the taxes on healthcare services turn out to be quite substantial and the burden is higher for the bottom 40 per cent, as bulk of healthcare expenditure is on medicines (which are taxed at a higher rate than medical services), and particularly so for the bottom 40 per cent.
The NATHEALTH-EY study analyses how many inputs going into the healthcare sector are taxed heavily but remain blocked in the value chain as the sector is exempt at the output end. Therefore, the report posits that the phasing away of exemption and bringing the healthcare sector under the GST ambit with some kind of merit rate at the output healthcare service would help in solving the problem of embedded taxes by allowing pass through of input tax credits in the healthcare value chain and thereby would slash the healthcare cost for end consumers.
But to determine the merit rate, it is crucial to first estimate the quantum of embedded taxes in the healthcare sector. Which is what the NATHEALTH-EY study set out to do.
Based on the data provided by six hospitals and six testing labs and diagnostic centers in India which were part of the NATHEALTH-EY study, it is clear that the sector has not derived the benefits of GST transition, with increasing rather than decreasing embedded taxes. For hospitals, the embedded taxes rate has increased from 4.3 per cent in 2016-17 to 5.7 per cent in the GST period while for testing labs, the embedded taxes rate has increased from 3.8 per cent to 5.8 per cent.
As per the report, the inputs leading to blocked input taxes are different for both these segments. While hospitals incur higher expenditure on medicines (both general and lifesaving) as well as contractual labour for cleaning, maintenance and repair services of hospital facilities, they also on an average hire more contractual labour in comparison to testing labs, on which they incur GST rate of 12-18 per cent depending on the nature of the contractual labour hired. In contrast, testing labs incur high expenditure on chemicals, reagents and kits to cater to the high volume of testing demand emerging in India. Such testing labs also have higher marketing expenditure as compared to hospitals, points out the report.
The NATHEALTH-EY study puts up four options for discussion. Either the status quo is maintained, with the healthcare sector continuing to be GST exempt. Option 2 proposes a zero rating on healthcare services, which will cause no change in price to the consumers while also reducing the burden of embedded taxes on healthcare service providers. In the third option, a suitable GST rate may be levied on output services for all private hospitals and an optional dual rate structure may be given for government establishments. The fourth option proposes a combination of these three options.
As the government considers a large-scale GST rate rationalisation exercise across sectors, it is imperative that these anomalies are corrected so that healthcare costs are made more, not less, affordable.
VIVEKA ROYCHOWDHURY Editor
viveka.roy3@gmail.com