Experts state that the cost of healthcare will increase as the tax on inputs has been hiked
By Team HR
It is laudable that the government has accorded healthcare, and the diagnostics sector, the importance that it deserves by deciding to exempt it from GST, making access to medical services easier for the people. It is a fine attempt to bridge the economic difference between the private and public sector as the anti-profiteering clause makes it mandatory to reduce prices for consumers with the decrease in tax rate on supply of products. This move also allows for innovation as the fiscal burden on the sector will lessen. I am sure there will be no adverse impact on the diagnostics industry and customers can continue to have access to quality healthcare services without any significant increase in prices.
The biggest impact of GST will be the reduction in disparity of prices with a single unified tax system governing the nation, a detail which will have a positive impact on healthcare and diagnostics sector as well. While the diagnostic services are exempted from GST for the services provided to customers, a 12% GST tax will be levied on the supply of reagents and kits which are essential provisions. Despite this, it is expected that healthcare will become more affordable for the people.
The GST legislation is a giant stride in bringing transformation and transparency to business in India. The government has exempted healthcare services from levy of GST and therefore there will be no taxes paid by patients for services rendered by hospitals. The rates of GST on several inputs used in hospitals are increasing from July 1,2017. Besides certain capital equipment and accessories, the key increase in tariffs have been on services like maintenance of equipment i.e. AMC and labour contracts.
The other key impact on costs is where a hospital operates on a head quarter- branch model where costs relating to centralised functions are expended in the headquarters and the benefit of such service is being availed by branches in other States. Such costs would be liable to GST. By principles of GST, an exempt service cannot avail input credits. As healthcare is an exempt service such increase in taxes on inputs would increase the overall cost for the hospitals and thus will increase the overall cost of healthcare. We have represented to the Government through several business forums to either levy GST at a lower rate or to provide a ‘zero’ rate of GST for healthcare services. This will help healthcare providers to offset any input credit or to claim refund of GST and hence will also keep healthcare costs at the existing levels.
-Under GST, healthcare services are referred to as any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy as per recognised systems of medicine in India. They also include services by way of transportation of the patient to and from a clinical establishment. Given this, the healthcare sector had speculated, debated and discussed about implications of the impending GST Bill. The decision of the Indian Government to exempt healthcare services from GST has been good news for start-ups as well as established healthcare businesses. However, for the end-consumer the costs could rise, given the increase in input costs as proposed by GST. As per the GST regime, the tax rate for medical device sector was pegged at 12%, which could affect the overall cost structure of the healthcare chain.
Although hospital services are exempted from taxes under GST, the outsourced services, aesthetics and outpatient pharmacies are subject to GST imposition. In the pharmaceuticals landscape, the 5% tax rate on life-saving drugs that treat diseases like malaria, HIV-AIDS, tuberculosis, and diabetes is expected to marginally increase the prices of medicinal drugs, leading to a domino effect in the cost structures for healthcare sector. While this shift is dramatic enough, I am glad that the GST council has decided to make the transition as smooth as possible for India, by not moving the tax needle too drastically on the healthcare related goods and services segments.
The cost to the healthcare service provider would get impacted with an increase wherever tax rates fall under category of 18% or higher rate. On the other side, healthcare sector will be benefitted with GST due to elimination of multiple taxation and simplified process of interstate trading and tax setoffs particularly in pharmaceutical products. GST will bring a mixed effect to the healthcare industry.
With regard to the overall impact of GST on healthcare and healthcare services, there are still some scattered grey clouds of uncertainty but a lot of clarity as well. With regard to cost of medicine, depending on the use of medicine between generic to life saving to the source of production, there were about six to eight taxes which have all been done away with and there seems to be an overall saving of about 3% to 4% overall on cost of medicines which is good.
Likewise, the cost of medical equipment is also likely to be reduced by a similar 3%. In the case of both the above, it will have to be seen if the producers of medicine and equipment will pass on the benefit to the purchasers.
The bigger grey cloud is the impact on rising input costs of provision of healthcare services. Since healthcare services were in the exempt category of service tax and continues to be in the exempt category of GST, it largely means that all the inputs costs cannot be offset and will have to be absorbed to an extent. There has been a 3% increase as compared to service tax on many major costs such as leased assets, utilities, manpower costs, benefits to employees (like hostel, housing services ) telephone, internet and all consulting services. Most of us will need a couple of months to fully estimate the impact of such and the endeavour would be that it does not affect the cost of care to the customer.
Overall, the GST is a good move and brings in a lot of clarity to previously unclear cessation and levies, archaic inclusions such as luxury tax (in Karnataka) applicable to healthcare service providers as well. The timing of the regulation is also good that it has come during a low inflationary period (would have otherwise had an impact on all pricing for acceptance ) and has clearly brought a lot more aspects in to the ambit of taxation. This is a good prospect from a developing country and further strengthens the transparency momentum that the Modi Government has been driving. Thus far, the government has also been very proactive and reactive of revision of rates and measurement of quick impact which are again good signs.
Healthcare services have been exempted from GST to a large extent. Therefore, the status, by and large, would be as before. However, there is a change in the inputs costs for the service provider in terms of increase of tax on outsourced services like housekeeping, security, etc. This would push the costs of treatment upward. We have yet to analyse the impact of change on prices of medicines and consumables. This factor would entirely depend on the manufactures who will be fixing the prices afresh. By the information so far, on this account, the impact on the cost to the patient should be very marginal
The GST being a radical shift from the existing tax regime, the government of India has kept in mind a smooth and flawless transition by not raising or reducing the existing tax rate on goods and services too drastically. It was also agreed to keep the existing list of items that are exempt from taxes intact in the new regime. Healthcare, hence, found itself on the exemptions list again even under the new regime.
But there exist two sides of a coin. Similarly, though the healthcare services are exempt on one side, the inputs used to provide such healthcare services are now taxed under the 12% tax bracket in total contrast to the old tax bracket of 2% -5.5%. Subsequently, the cost of surgeries and other medical procedures that involve use of such inputs, will now go up considerably.
Secondly, housekeeping services and security services which are essential to the healthcare sector are also now taxed at a higher rate of 18%. An increase in the rate of these services lead to increase in the day to day operating costs of any healthcare establishment. Thirdly, ancillary medical procedures and diagnostics including reagents, which play a key role in treatment, have been put under the 12% and 18% slab. This means, the cost of diagnostic services will go up considerably.
Until now, life-saving drugs had been exempted from excise and customs duties. But GST has now slotted them compulsorily under the 5% slab, while categorising formulations into the 12% slab (up from 9%). As a result of all the above, the increase in the input costs to the hospitals have only one way out. They have to be passed onto the patients. The only relief is that luxury tax on room charges has been subsumed into GST and hence, patients will no longer be charged a separate luxury tax.
Hence, the overall cost of healthcare will increase as tax on inputs of hospitals including equipment, accessories and services such as maintenance of equipment and labour contracts, will rise. But the positive aspect of GST is that, there will exist a seamless input tax credit system, which shall pose like a boon in spite of all the enhanced costs.
Healthcare sector has long been outside the indirect tax ambit for various social and political reasons and continues to be exempt under GST as well. While this may appear to be a patient-friendly move, the GST applicable on expenses incurred by hospitals continue to be a cost, which means patient bills may not come down under GST. In fact, hospitals would have increased costs as taxes on services and prices of medicines are expected to increase broadly by 3%. Luxury tax on room charges have been subsumed into GST and could bring some relief to patients.
The GST will be a boon to patients and the sector as the uniform tax system is expected to make healthcare more affordable. Under GST, duty charged on the import of advanced medical equipment would be allowed as a credit, a move that is expected to reduce overall costs. The pharmaceutical sector is also expected to get the benefits as GST will help to streamline the taxation structure and increase operational efficiencies.