Union Budget 2013 – Implications for healthcare sector

The Indian healthcare industry is witnessing growth at a rapid pace and it is expected that the sector will touch $280 billion by 2020. The hospital services market is expected to be worth $81.2 billion by 2015. The major factors driving the growth in the sector are increasing population, growing lifestyle related health issues, easier accessibility to healthcare, thrust in medical tourism, improving health insurance penetration, rise in middle income group population, increased disposable income, government social sector initiatives on penetration of health insurance and focus on public private partnership (PPP) models.

As the Indian healthcare industry has been displaying strong growth prospects and in view of the prevalent optimistic atmosphere, many foreign companies have been displaying eagerness for investment/setting up their base in India and looking to have an access to the untapped market in Tier-II and Tier-III cities. During the period April 2000 to June 2012, the foreign direct investment (FDI) in hospitals and diagnostic centres is $1395.82 million, medical and surgical appliances is $523.54 million and drugs and pharmaceuticals is $9,659.26 million.

The year that went by – A quick glimpse

• India’s gross domestic product (GDP) growth for 2012-13 was projected at around 7.6 per cent; however, the actual GDP growth estimate is only five per cent. At the same time, the expenditure on health has been increased from 1.27 per cent of GDP in 2007-08 to 1.36 per cent of GDP in 2012-13.
• The demand for hospital beds in India is expected to be around 2.8 million by 2014 to match the global average of three beds per 1000 population from the present 0.7 beds. India needs 100,000 beds each year for the next 20 years.
• The Government of India (GOI) has launched a large number of programmes and schemes to address the major concerns and bridge the gaps in existing health infrastructure and provide accessible, affordable, equitable healthcare.
• During the period from April 2000 to November 2012, the share of hospital and diagnostic centres in cumulative FDI equity inflows amounts to 0.82 per cent.
• The GOI has introduced a new medical visa category for the foreign tourists coming to India for medical treatment. The GOI has also formulated guidelines to address various issues governing wellness centres, covering the entire spectrum of the Indian systems of medicine.
• Research & Development (R&D) occupies the second position in India’s GDP with consistently high growth at near 20 per cent in the last few years. The GOI has also stressed the need to enunciate a policy for synergising science, technology and innovation and has also established the National Innovation Council. The GOI has announced the Science, Technology and Innovation Policy 2013 and has proposed to increase the gross expenditure on research and development to two per cent of GDP from the current level of less than one per cent.
• As the Indian healthcare industry has been displaying strong growth prospects, many foreign players are eager to make investments in India. The private equity (PE) firms have made three major investments in the healthcare sector during the calendar year ending December 31, 2012. During the year, the PE investments have made investment of $100 million in the hospitals and clinics sector. The healthcare and life sciences industry attracted $581 million across 14 investments made by the PE investors. The PE investors have quadrupled their investment in India’s primary healthcare, betting the sick and ailing will stop approaching family doctors as the migrants in cities look out for a brand. During the year, the PE investors have invested $520 million into India’s basic healthcare industry and there is a prediction that PE investments will surpass $1 billion in 2013.
• The Parliamentary Standing Committee on Health and Family Welfare tabled a report in the Parliament on May 8, 2012 on the functioning of the Central Drugs Standard Control Organization (CDSCO). CDSCO is the agency mandated with the regulation of drugs and cosmetics in India. The report covers various aspects of drug regulation including organisational structure and strength of CDSCO, approval of new drugs, and banning of drugs, among others. Subsequent to submission of the report, the Ministry of Health and Family Welfare has constituted a committee to verify the procedure of drug regulation.

Policy initiatives Insurance Regulatory and Development Authority (IRDA) expands definition of ‘infrastructure facility’

• IRDA has expanded the definition of ‘infrastructure facility’ under its Registration of Indian Insurance Companies Regulations. In a gazette notification, the insurance regulator passed an amendment to the regulation wherein the term ‘infrastructure facility’ will be replaced by ‘harmonised master list of infrastructure sub-sectors’, as specified by the Department of Economic Affairs, Ministry of Finance in March 2012. This aforesaid amendment has expanded the investment horizon of insurance companies and will enable them to invest in new categories of infrastructure including the hospitals and diagnostic centres, since the definition has been expanded.

Policy measures in the Budget speech by Finance Minister

• Recognising the importance of the healthcare sector, the Government has allocated Rs 3,73,300 million to the Ministry of Health & Family Welfare as well as Rs 2,12,390 million to the New National Health Mission. Education in health remains a priority and the Government has allocated Rs 16,500 million to AIIMS-like institutions and Rs 47,270 million for medical education, research and training.
• Additionally, given the landscape of talent availability in medical profession in India, the Government plans to make Ayurveda, Unani, Siddha and Homeopathy (AYUSH) practitioners mainstream and the Budget 2013 proposed to allocate Rs 10,690 million for the same. An allocation of Rs 6,58,670 million is made to the Ministry of Human Resource Development, which is an increase of 17 per cent over the revised estimates of the current year. The National Programme for the Health Care of elderly is being implemented in 100 selected districts of 21 states. The Budget 2013 proposes to provide Rs 1,500 million for this programme.
• The Budget 2013 proposes to allocate a sum of Rs 1,100 million to the Department of Disability Affairs for the assistance of disabled persons scheme in 2013-14 as against the revised expenditure of Rs 750 million in the current year.

Government initiatives

• The government is taking numerous measures to encourage investments in the sector. There has been a focussed approach to increase supply of all healthcare professionals, strengthen primary healthcare delivery by incentivising government health workers and to increase health insurance coverage among the lower socio-economic population. In addition to these, some initiatives by the government have been taken, primarily to support private sector participation. There is a growing appreciation for the role that the private involvement may have in meeting public demand, and government are considering the use of PPP models to help improve infrastructure and healthcare provision.
• The National Rural Health Mission (NRHM’s) allocation has been increased to $3.82 billion in 2012-13 from $3.32 billion in 2011-12. Under NRHM, over 1.4 lakhs health human resources have been added to the health system across the country upto September 2012 and 10,473 sub-centres, 714 primary health centres (PHC’s), 245 community health centres (CHCs) have been newly constructed. The total plan outlay for the year 2012-13 under the NRHM, is Rs 2,05,420 million and Rs 27,127 million for schemes/ projects in the north eastern region and Sikkim.
• The Indian system of medicines is also being developed and promoted by integration of AYUSH in national healthcare delivery through an allocation of Rs 9,900 million plan outlays in 2012-13.

Tax proposals for healthcare sector

• No change in corporate tax rate. However, increase in surcharge from five per cent to 10 per cent on domestic companies (e.g. shipping agency companies, other domestic companies incorporated in India) and from two per cent to five per cent on foreign companies where taxable income exceeds Rs 10 crores. Also, surcharge increased from five per cent to 10 per cent on Dividend Distribution Tax (DDT).
• Direct Taxes Code (DTC) Bill is intended to be introduced at the end of budget session after considering recommendations of Standing Committee.
• Provisions of General Anti Avoidance Rule to be applicable from AY 2016-17.
• TDS on royalty and fees for technical services income payable to non-resident increased from 10 per cent to 25 per cent. However, the tax rate in case of treaty shall prevail wherever applicable. In context of Healthcare sector, this may have huge tax implications in respect of payments for brand, hire charges for equipments etc. especially to non-treaty entities, e.g. Hong Kong.
• Tax to be deducted at source at one per cent on the value of the transfer of immovable properties where consideration exceeds Rs 0.5 million.
• Extension of concessional tax rate at 15 per cent on dividend received by Indian Company from foreign company for AY 2013-14. Further, no DDT shall be payable by Indian holding company to the extent of dividend income received from its foreign subsidiary. This would be beneficial in respect of outbound investments where dividend is receivable from foreign subsidiaries.
• Profits distributed by unlisted companies to shareholders through buyback of shares shall be subject to final taxes (similar to DDT) at 20 per cent payable by the Company. The income arising to shareholders shall be exempt.
• Progress in Goods and Service Tax (GST) legislation introduction with consensus reached between Central and State Governments for drafting Constitutional amendment Bill and respective State GST Bill to be placed before the parliament in few months.
• MRP-based assessment in respect of branded medicaments of AYUSH and bio-chemic systems of medicine to reduce valuation disputes under Excise Regulations.

Conclusion

In light of the strong growth prospects of the Indian healthcare industry and the foreign players displaying eagerness for investment and setting up their base in India, the Government of India and the Ministry of Finance have allocated a substantial amount for health sector. However, certain other expectations of the industry such as granting ‘infrastructure status’ to the sector, extensions of tax incentives for setting-up hospitals in Tier II and Tier III towns of India, etc. have not been met. The Budget thus falls short of direct tax clarifications on the issues faced by the healthcare sector.