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On June 29, the GST council recommended that hospital room rent (but not including ICUs) will incur a 5% tax if the rent exceeds Rs 5,000 per day.
Healthcare services in India are exempted from GST when they are provided by “a clinical establishment, an authorised medical practitioner or para-medics” or “by way of transportation of a patient in an ambulance”.
This exemption also applies to public health services such as counselling, preventive activities, health awareness, veterinary services and hospitals’ accessory services, such as bio-medical waste management, blood banks and retention money. However, it does not apply to procedures like hair transplants or cosmetic or plastic surgery, except when they are required to restore critical physical abilities.
An exemption means that end-users don’t have to pay GST. Various state-level Authorities for Advance Ruling have said that these exemptions apply to those services necessary to alleviate pain and suffering, to survive, sustain life, rehabilitate, diagnose, cure or continue treatment.
As there is no additional financial burden, the exemption provides significant relief to those receiving care – given that India’s out-of-pocket (OOP) health expenditure is catastrophic.
Nearly 40% of Indian households that had to hospitalise a member have also experienced financial shocks, indebtedness, impoverishment and lost care. At 55% of total health spending, India’s OOP situation needs to be improved drastically. The key reasons for this expense ratio are low government spending and inefficient use of resources.
So as such, a GST exemption carries many moral, ethical, social, economic and political considerations.
India’s hospitals pay GST to procure their inputs as goods (reagents, equipment, medicines, consumables, implants, prostheses), services (maintenance, housekeeping, security), and capital expenses (medical and non-medical equipment).
GST on medicines is mostly 5% while most other procurements fall in the 12% and the 18% GST slabs. In some procedures, such as surgery with a high-end implant, up to 50% of the total cost includes 12-18% tax.
So depending on the intensity, type of care and clinical speciality, GST alone can account for 6-10% of the total procurement cost. At an aggregate level, almost 50% of hospital expenses could include some GST payments.
A firm’s expense as a GST payment on production inputs is adjustable as an input tax credit (ITC) from its total GST liability. An important goal of the government’s GST reform is to ensure the free flow of ITC across the entire value chain. This view brought several exempted goods and services under GST at the roll-out – while healthcare services remained exempted.
Under current GST rules, ITC is not allowed for exempted services. So hospitals can’t claim ITC despite their inputs’ high embedded GST costs. The oft-quoted official reason for healthcare exemption is to shield hospitals from challenges due to mandatory GST registration and tax-return filing procedures.
However, this proved irrelevant: several non-core hospital activities were taxable, such as leasing, training, consulting, pharmacy sales and catering – and for which most hospitals still have to complete GST procedures.
Thus, the hospital industry has argued that the current provision of ITC is a missed opportunity to reduce the cost of healthcare services, and has been demanding a nominal GST for patient care for ITC to be submitted.
However, a lower rate on outputs than the inputs results in an inverted tax structure that is good for the business but affects government revenue. The GST council had formed a group of ministers to examine and correct the inversion – such as earlier in the mobile and leather industries and currently in the apparel industry, where the GST on finished goods is lower than for the raw material.
The council’s latest recommendations, including the GST on hospital room rent, come from this group of ministers. The hospital industry is disappointed that the government has not allowed the ITC even as GST now selectively encompasses room charges.
The industry believes savings due to ITC can be passed on to patients for their benefit. This sounds tempting – but there are strong reasons to believe that the opposite will be true. The council is aware that low GST led to profiteering in the past, when the benefits didn’t reach end-users.
At the outset, controlling profiteering has been a particular focus of the GST’s implementation. Also, when implants, stents and drug prices were capped, some large hospitals reportedly shifted their practices to charge higher fees for other aspects of care – leaving patients paying the same or even more.
So it is unclear how hospitals will pass on benefits or how profiteering by hospitals may be checked. ITC gains will materialise later, but patients in the meantime will be forced to pay the GST immediately, during their hospital stay. It is not difficult to imagine the practical difficulties in its execution.
Industry members often refer to a December 2015 report by the chief economic advisor, ahead of the GST implementation. The report, entitled ‘Revenue Neutral Rate on the structure of rates on GST’, found that healthcare taxes are among the highest – and that the burden on the bottom 40% of healthcare seekers is higher because the majority of healthcare expenditure is on medicines, which are taxed at a higher rate than medical services.
But using this finding to justify the exemption of hospital services is fallacious. The right policy response should be interventions that reduce OOP medicine spending. Low GST rates on medicines can achieve this. However, this can significantly strain government revenues and complicate GST laws and procedures.
A healthier way to achieve the same effect is to promote generic medicines and increase the availability of medicines in public health facilities through bulk procurement at low prices. The intervention – well within the health sector’s purview – can reward drug manufacturers for efficiency and use of economies of scale. The government has already pushed for generics by expanding an existing national programme.
In practice, the demand for hospital beds often exceeds the supply and increases room charges, which include the costs of accommodation, nursing and support services (because these services, unlike those of doctors’, are not readily quantifiable and hence bundled with bed types).
Also, room charges tend to rise rapidly because healthcare inflation is higher than non-core retail inflation. For this reason, it’s likely that even in small private hospitals in smaller locations, room charges easily exceed Rs 5,000 per day and can’t be considered a discretion or a luxury.
Therefore, the GST council must reconsider its view of charging those who can afford it. At 5% GST on actual charges paid over Rs 5,000, every Rs 1,000 increase results in an additional payment of Rs 50. This may seem nominal but is undesirable, given the country’s focus on reducing OOP health payments. Nationwide, the private sector accounts for almost 60% of hospital admissions, and as an increasing number of patients will pay more in most cases, the OOP payment situation will only worsen.
Almost 400 million Indians – most of them in lower-income groups – are uninsured and will be hit the hardest. For the insured, the effect on claims may lead to an increase in premiums.
Industry practices are also likely to change to negate the impact of the GST. Hospitals can adopt a ‘Bata price strategy’, (like Rs 4,999 per day) to save taxes. Insurers can enforce such practices through special collective agreements with hospitals (‘preferred provider network’).
In this case, the government’s revenues may not increase as expected, and this policy will risk becoming unpopular and may obscure the government’s previous efforts at people-centric healthcare reform, which can be avoided.
Arun Kumar Tiwari is a public-health professional with expertise in health-financing.