There is no doubt in saying that the implementation of the GST has largely been beneficial to most of the sectors across spectrum. However, it is also true that the gains of GST have eluded important sectors like healthcare services which has been kept under the exemption list. Presently, the healthcare services provided by a clinical establishment, authorized medical practitioner or paramedics, are exempted from GST.
One of the most important features of GST is to boost the competitiveness of businesses by ensuring free flow of input tax credit across the value chain. At the time of the implementation of GST, to ensure smooth flow of credit, the GST Council felt the need of reviewing many exemption notifications (including 299 Central exemptions and over 90 State exemptions) with an aim to bring in as many items under the GST net. However, at that time, the healthcare services were kept under the exemption list on the assumption that a large number of health establishments would not come under the GST regime and would be relieved of fulfilling a lot of GST-related procedures like ‘Registration’ and ‘filing of Returns’.
However, the flip side of this was that the most promising feature of GST of facilitating input tax credit got restricted as most of the inputs procured by the healthcare establishments in the form of input goods (drugs & medicines, consumables, chemicals, power, and fuel), input services (leasing charges for buildings and construction, repairs and maintenance, housekeeping services, security services, rents) and capital goods (medical equipment, office equipment, plants and machinery, furniture and fixtures, vehicles) bore the GST duty burden, but these embedded taxes could not be set off against the output tax liability because of the exemption at the output service level. On account of this, the blocked credit which remain unutilized in the value chain gets loaded into the healthcare cost raising the cost of healthcare services in India.
This point was also emphasized by the Former Chief Economic Advisor in his report on ‘Revenue Neutral Rate on structure of rates on GST’ released in December 2015, before the implementation of GST that reducing exemptions on healthcare services under the GST regime would be more consistent with social policy objectives and therefore healthcare services should also be brought under the GST net, especially the private sector segments so that the burden of taxes on inputs could be relieved. The report also mentioned 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 Economic Survey 2021 has reiterated the National Health Policy 2017 in stating that India has one of the highest out-of-pocket expenditure in healthcare contributing directly to the high incidence of catastrophic expenditures and poverty and envisages it to be reduced from present 65 per cent to 30 percent, by significantly increasing the public spending in the healthcare from current 1 percent to 2.5 – 3 per cent.
Healthcare is a segment which has become vital in the recent times. The outbreak of Covid-19 pandemic has reemphasized the need of expanding the equitable access to healthcare services facility across the country and the governments vision of making India an affordable healthcare destination as envisaged under the National Health Policy 2017. Any step in this direction which would ensure reduction in the healthcare cost will be prudent.
One low hanging fruit here could be to rationalize the GST rate structure in the healthcare services sector. Before taking up this exercise, it would be important to conduct a comprehensive study to estimate the quantum of embedded taxes that remains blocked in the value chain raising the healthcare cost. To get a holistic view, it would be useful to estimate the embedded taxes segment wise which would include hospitals, nursing homes, clinics and diagnostic centres. It would be interesting to estimate and assess the differentials in the quantum of embedded taxes across these segments. Post this assessment, the most rationale GST rate structure could be explored that would help in lowering the tax incidence by allowing free flow of input tax credits, thereby eventually reducing the healthcare cost.
To sum up, the GST rate rationalization exercise in the healthcare sector is both timely and sensible, as it opens the door of possibility even in a limited way for reducing the healthcare costs and giving a thrust towards making India an affordable healthcare destination.
(The writer is National Leader, Tax and Economic Policy Group, EY India. Deepraj Pathak, senior tax professional, Tax and Economic Policy Group, EY also contributed to the article)
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