Though it might usher more transparency, experts fear rise in healthcare costs due to trickle-down effect
The roll-out of Goods and Services Tax (GST), touted as the country’s biggest tax reform, has evoked a mixed response from the healthcare sector. Though it is exempted from GST as a segment, experts foresee a trickle-down effect and many fear rise in medication and hospitalisation costs as some services and healthcare products are taxed at 15-18 per cent.
Healthcare experts from diverse segments voiced that GST is a remarkable step taken by the government and exempting healthcare from it will help the consumer to some extent. However, they have also cautioned that input tax levied on products and services, will impact the costs for healthcare providers. The hospitals and the companies working in this domain will try and absorb the cost themselves to a certain point. However, in the long run, consumers will have to pay the service cost.
The GST effect
Elaborating on the new tax regime, Malyawant Passi, CFO, Jaypee Hospital, said, “The healthcare sector in terms of hospitals were exempted from indirect taxes in the pre-GST era i.e. upto June 30, 2017 and continues to be exempted under the GST regime. For the hospitals, input services which were used/consumed by the sector, like security and laundry services were earlier taxed at 15 per cent (as service tax) while it is proposed to be at 18 per cent. There shall be a proportionate incremental cost for the hospital. There are certain large equipment, which were taken on specific arrangement with the vendors, where the payment due to vendors was on operational cost and was broadly subject to VAT at five per cent. In GST, the same is now defined as a service, and hence will be charged at a much higher rate of 12 per cent. Hence, the result is that the taxes on input services of a hospital will go up.”
Patients’ bills are likely to increase by four per cent as the cost of most of the drugs, reagents and disposables that hospitals use have increased at least by five per cent. High-end medical equipment, which attracted 12.63 per cent tax, is now will be taxed at 17.28 per cent. Healthcare devices and accessories such as catheters which were charged at 10.16 per cent will now be taxed at 23.15 per cent. Hospital beds which were taxed at 11 per cent, will now be taxed at 18 per cent. Lifesaving drugs and diagnostic kits will attract 18 per cent tax, a steep jump from 5.5 per cent. Also, the hospital infrastructure costs— for instance, comprehensive maintenance contract — has scaled up from eight per cent to 18 per cent. This will raise hospital expenditure significantly.
Soon after the roll-out of GST, Prathap C Reddy, Chairman, Apollo said if there is an increase in healthcare cost by up to two per cent, hospitals would be in a position to absorb the hike, but anything more than that would have to be passed on to patients.
“There is no GST for us (hospitals), but there are services and some products with GST rates ranging from 15 to 18 per cent, the cost of which should be borne by us. If the increase is up to two per cent, hospitals can absorb it, but if it is three or four per cent, then patients will have to bear it,” Reddy told the media soon after the roll-out of GST.
Sandip Khosla, COO, Paras Hospital, observed that GST is a progressive step. However, he also said that it will impact all segments of the healthcare industry. “Exempting the healthcare from GST, this industry has been given the importance it deserves. The costs of several services in hospitals have gone up to 12 per cent. This is also true in the case of medicines which were earlier on a tax slab of two per cent and 5.5 per cent. Now, it is in the tax slab of 12 per cent and this will impact the end user, unless the healthcare provider is willing to absorb some of the impact on the costs. We definitely agree that the costs of the same shall increase to 10 per cent in the initial stages. However, until the complete impact of GST is not realised, it is too early to state anything. In the long run, we definitely expect relaxation and reduction in the input prices,” he said.
Khosla also noted that though hospitals are exempted from GST, the input costs are still subject to GST taxation, he said, “The prices are bound to rise due to the same, however, we are certain that with the time to come and due to the robust taxation regime of GST, the economy shall benefit. We need to give time to the industry to adapt to the new taxation. Hence, we are not looking in for amendments to the GST regime, but time for adaptation.”
Giving his opinion, Jagannath MS, CFO, Columbia Asian Hospitals India, said, “The primary issue healthcare providers are facing is of being classified as ‘exempt from GST’ by the government. Being exempt, hospitals would not be able to avail credit on inputs, primarily on service tax increases proposed by the legislation. Hence, these costs will have to be passed on to consumers of the service which will result in higher cost of healthcare. As far as hospitals are concerned, though industry bodies requested the government to either look at a five per cent GST for hospitals services or consider a zero rate of GST. If this happens, increases in input taxes can be offset with the output GST or in a case of ‘zero’ tax hospitals can avail a refund. So, rationalising the tax structure in case of hospitals would help resolve the problem.
Amol Naikawadi, Joint MD, Indus Health Plus, reiterated, “Different GST structures have been fixed for many utilities that are used in the healthcare sector, making it easy for the finance department to levy tax. However, healthcare will become expensive as the goods, products and services consumed by majority healthcare providers fall under 12-18 per cent category. Hence, in future, the end consumers will bear the extra cost on healthcare delivery due to input tax levied on them. Many companies having presence in multiple states will face challenges in state-wise registrations with regards to compliances, documentation.”
Explaining the domino effect in the cost structures for healthcare sector due to GST imposition, Ameera Shah, MD and CEO, Metropolis said, “Hospital services are exempted from taxes under GST. The outsourced services, aesthetics and outpatient pharmacies are subject to GST imposition. In the pharma landscape, the five per cent tax rate on life-saving drugs that treat diseases like malaria, HIV-AIDS, tuberculosis, and diabetes are expected to marginally increase the prices of medicinal drugs, leading to a domino effect in the cost structures for healthcare sector. The decision of the 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. It will create a risky situation for the common man as the tax charges are tweaked up to a substantial number. It is observed that the GST is more likely to affect the healthcare industry. 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.
Many healthcare entrepreneurs voiced that they will observe the actual impact on input cost for sometime. They further said if the percentage is small they will absorb the cost, and if it increases, then it will passed on to the consumers.
Adapting to GST
In the past few months, the GST has been the sum and substance of many debates and speculations within the healthcare industry. The impact of the new tax regime on business processes, be it small, medium and big hospitals, shall remain the same, irrespective of the size of business, according to healthcare entrepreneurs.
“Small hospitals have to ensure that they don’t deal with unregistered vendors/ suppliers as the same would result in tax payment under Reverse Charge Mechanism. Large hospitals, which provide taxable services like plastic surgery for beautification, need to ensure that all the expenses directly related to such activity shall be segregated as tax credit of the same could be availed 100 per cent and for unsegregated expenses, proportionate credit is available. Large and medium hospitals have to be careful in availing these credits based on their last year performance and should finally reconcile it in March 2018, based on actuals,” Passi informed.
Supporting his view, Jagannath said, “The impact may not be very different between smaller and bigger hospitals in terms of percentage increases. However, hospitals which operate under ‘Headquarter-branch’ model, where the HQ and branches are in different states, GST on HQ benefits received by the branches would increase the input cost of the branches. Typically under this model, a HQ functions as a cost centre with centralised functions like finance, accounts, treasury, legal, HR, tax, IT, etc. While all these centralised functions are performed within the HQ, the benefit thereof is received by all branches. The GST law envisages that costs should follow the benefits, i.e. that if the branches avail the HQ services, then they should also be passed on to the relevant HQ costs as are apportioned/ allocated to them. The said cross-charge (being a consideration for provision of HQ services by the HQ to the branch) would constitute a taxable service and would attract GST. As the hospital service is exempt, such tax on the inter-company service would have to be absorbed by the branch hospital and thus would increase the cost of healthcare.
However, GST would also usher in certain positive changes.
GST
Pros
- For healthcare industry as a whole (taxable), the biggest advantage is single nation single tax, which means tax liability is same across the nation which was different in pre-GST era.
- To a certain extent, cascading effect of taxes will be eliminated with the introduction of GST as earlier for trading activities, taxes paid on services was huge along with the VAT on goods. As all the credits are allowed in the GST regime this cascading will not be there.
- For import of medical equipment as Countervailing Duty and Special Additional Duty besides the basic custom duty is replaced by IGST, there will be seamless flow of taxes which should bring down the cost of such imported machinery or material.
- Multiple registrations were required in the pre-GST era like VAT, Service Tax and Excise Duty. Each had their own typicality’s/ conditions. In GST, these multiplicity of registration will not be required.
Cons
- Healthcare services being exempt from the levy of GST, all taxes paid on input remains a cost.
- Leasing arrangement of equipment which were charged under VAT @ 5 per cent earlier and shall be treated as a service under GST and at a higher rate of tax @12 per cent and shall have an impact on the bottom line.
- Some medicines for which the tax rates have been revised upwards will also have an impact on the bottom line.
- For the pharmacy business, though tax credit will have a positive impact, the compliance cost in terms of returns etc. shall increase.
- For manufacturers of medical equipment, which supplied these equipment across the country would need to change their supply chain management as stock transfer are also subject to tax, which will have a huge impact on working capital requirements.
- As a Service Provider, in the Pre-GST era, business could avail centralised registration (Under Service Tax), however, in the GST era whatever you propose to supply from, you need to get registered in the specific state.
- Advertisement under print media is taxable at 5 per cent under GST which was exempt under Service Tax.
For instance, throwing light on starting new business and new ventures, Khosla, said, “There have been different tax rules in different states which have impacted new startups or expansion to other places in complicating processes. A centralised registration system will make all these easier and impact the economy also. With the government looking at an increase in the exemption limit to ` 25 lakhs under the GST which was at ` 5 lakhs earlier, this will impact a large and significant percentage of new venture capitalists and entrepreneurs to give them opportunities of expanding their businesses. The reduction of the tax burden will certainly have a positive impact.
Delivery of services and goods will be impacted as they will improve in logistics as well. Under this game changing bill there is no entry tax. This will encourage entrepreneurs additionally. Systems will be transparent and this will lead to no tax evasion paving the way for more facilities and services for the end user or consumer.
GST is said to create a level-playing field for healthcare companies, irrespective of their geographical location within the country. The medical devices sector urges the government to support ease-of-doing business, reduce cost of compliance and provide entrepreneurial impetus via GST.
Medical device – urge for compliance
Medical devices are either manufactured in India or imported, and they have two arrangements with the vendors i.e. buying the equipment or leasing the equipment on the specific terms and conditions. Before GST on imports, there was Centre Value Added Tax (CENVAT) available for CVD paid on imports against excise duty and SAD (In lieu of VAT) were subject to refunds. In the GST regime, there will be IGST charged on the imports and if the hospital is acquiring the asset, there will be an incremental cost for the hospital. Assets taken on lease on certain terms and conditions attract 12 per cent service charge now; earlier it was five per cent under VAT.
Medical Technology Association of India, an association of research-based medical technology companies, has informed that the current GST dispensation for healthcare that keeps the hospital services exempt from GST and fixes rates that range from five to 28 per cent on medical devices will do little to lower the existing medical costs for the common man.
“It would have helped if the medical services were zero-rated, similar to exports, where full tax credit against inputs would be refundable, and all devices were taxed at a standard rate of five per cent GST. On the contrary, many medical devices have seen higher GST rates than the embedded tax earlier. The increase ranges from about 1.5 per cent (for devices attracting six per cent CVD earlier) to 4.5 per cent (for devices under nil CVD). Besides, the maintenance cost of the Capital Equipment went up by three per cent, owing to an increase in GST to 18 per cent versus previous Service Tax rate of 15 per cent. There was an across-the-board increase in custom duties board in early 2016 as well. A successive increase in GST will force the suppliers to raise prices of devices. This will only add to the cost of medical services. A lower and uniform GST rate of five per cent, when combined with the anti-profiteering law would have helped to bring down the cost of medical service to patients, and also attract investments to the sector and expand reach,” MTaI urged.
Giving an overall perspective of medical equipment industry, Naikawadi said, “GST has lowered tax burden for medical equipment industry. Now companies working in this domain need to pay one uniform tax which will ease the process of operating business and there will be no double taxation.”
Not just medical devices, GST has also moved the healthcare space towards a ‘digital economy’. It is helping the industry to be completely transparent with respect to all transactions under the tax net and bringing in a level playing field for the players. Healthcare is expected to benefit because of this macro change.
Going digital
The biggest change is compliance in digital platform. Post GST, every organisation has to go through compliance modification in their IT systems and software. Everything from back-end processes, filing, documentation, etc. have to be GST enabled.
Listing out the changes made by Columbia Asia Hospital India, Jagannath said, “We have made several changes to the software to manage invoices and related forms, billing, returns and MIS required for the purposes of fulfilling the statutory requirements under the GST. Also, we are developing interfaces to connect with third party vendors for filing purposes.”
As for Paras Healthcare, Khosla stated that the HIS system of the hospital has become GST compliant and it has been done on a priority basis to ensure that the patients receive the benefit, there is no confusion and the entire healthcare becomes compliant to new taxation regime.
Wait and watch
As a whole, the hospitals welcome the fundamental premise of the GST legislation, which is to avoid cascading effects of indirect taxes and thereby bring about lower costs of products and services which is a key consideration in framing the National Health Policy.
However, rise in healthcare costs emerge as a major concern. The healthcare sector experts find the new tax reform as a good step, but also suggest that the roll-out of GST needs to be given sometime, as the complete impact of GST is not yet realised.
Khosla sums up, “We sincerely believe until the complete impact of GST is not realised, it is too early to state anything. In the long run, we definitely expect a relaxation and a reduction in the input prices.”
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