GST is an indirect multi-stage tax introduced in India in 2017, which subsumes all of India’s central and state taxes in one format. The principal objectives of GST are to have an improved indirect taxation system, enhance compliance and accountability, and create a single national market that will eliminate trading barriers between states.
In India, GST is double; the central government controls CGST, and various state governments influence SGST. The tax rate slabs in GST include four, namely 5%, 12%, 18%, and 28%, with a couple of others being tax-exempt and zero-rated items. Implementing a GST regime has considerably affected the health industry concerning goods and services.
While the industry is doing well, it grapples with issues such as affordability, availability and quality of medicines and other services or products. The out-of-pocket spending on health care is still relatively high, denying this service to poor people. This problem is still experienced with the cost of drugs and equipment. This will be reflected in the healthcare sector in India, which will include the GST.
GST and Healthcare Services
A significant decision under the GST system was to exempt all healthcare services from tax. This means that services provided by hospitals, diagnostic centres, physicians’ clinics and nursing homes do not attract GST. Both public and private healthcare services are fully exempt.
This exemption aims to make essential healthcare affordable and accessible to all Indian citizens, especially economically vulnerable sections, by effectively reducing consumer rates. It brings down the tax burden on healthcare providers, patients, and health insurance policyholders. The higher disposable incomes due to reduced tax liability are also expected to encourage greater utilization of healthcare facilities.
However, the exemption implies that healthcare providers cannot claim an input tax credit (ITC) on their capital goods, material costs, and input services. ITC refers to the credit for taxes already paid by suppliers, which can be offset against GST payable on output. Disallowing ITC leads to blocked working capital and increased compliance costs, which may be transferred to patients. It also promotes tax evasion as the system provides no incentives for billing. The loss of ITC negatively impacts healthcare infrastructure projects and expansion plans for private sector players.
Compared to the previous service tax regime, with a rate of around 15%, the GST exemption directly lowers consumer taxes and costs. However, the inability to claim ITC significantly reduces potential cost savings that tax credits would have enabled. Policymakers must pay greater attention to availing input tax credits to unlock more significant reductions in healthcare costs. The National Health Authority has suggested allowing notional credit for healthcare service providers.
GST and Healthcare Products
The GST has categorized healthcare products into four tax brackets ranging from exempt to 12% to attract lower cumulative tax incidence on essential medical supplies. Products like insulin, diagnostic kits, and life-saving drugs supplied by UN agencies are exempt from GST, while common over-the-counter (OTC) drugs attract 12%.
Depending on product type and intended use, medical devices and equipment face 12% and 18% GST rates. Capital equipment imported for hospital infrastructure is taxed at 28% GST. Products not explicitly specified under these categories are placed under 12% GST.
Lower and moderate tax rates on most medical consumables and capital products help reduce input costs for healthcare service providers. This cost efficiency enables better pricing control and greater affordability of treatment for patients. Uniform categorization also provides clarity and certainty regarding GST compliance to manufacturers, traders, hospitals, and clinics.
However, complex classification procedures across four tax brackets have led to inconsistencies and ambiguities, causing confusion and compliance issues within the industry. Several representations by medical device associations are pending with GST authorities. Disputes have arisen regarding rates applicable for products such as nebulizers, thermometers, wheelchairs, etc. There needs to be more consensus on what constitutes luxury or demerit healthcare products that deserve higher GST levels.
The current structure encourages fragmentation of supply chains and intermediation due to varied distributor margins across tax slabs, leading to cost escalations that reduce affordability. A simplified two-tier GST structure has been suggested – a low rate between 5%-12% for essential medical supplies and a standard rate of 18% for non-essential products. The government has shown some receptiveness and corporations within adjusting rates and definitions amidst industry demands. The decisions also need to balance efficiency considerations along with quality, safety, and access priorities for the greater public good.
GST and Medical Tourism
Medical tourism refers to people travelling abroad to obtain world-class medical treatments at affordable prices, combining care with recuperation amidst superior hospitality services. Treatment costs, quality of healthcare professionals, infrastructure sophistication, political stability, tourist attractions and low waiting times are some factors that make countries attractive medical tourism destinations.
India offers advanced speciality care in cardiology. Organ transplants and orthopaedics are at nearly one-tenth of the price in developed nations with little or no waiting periods, leading to its emergence as a medical tourism hub. Leading Indian hospitals are accredited by JCI and follow global care protocols with internationally certified doctors delivering cutting-edge healthcare excellence. India’s medical tourism revenues have expanded by 25% post-GST implementation as the unified tax regime enhances India’s prestige and brand positioning in the global wellness market.
The exemptions from GST on critical health services reduce costs and spur volume gains that incentivize private players to invest in the latest technologies, specialized infrastructure and talent to serve overseas patients. Allowing input tax credits on capital equipment acquisitions and selectively reducing customs duty on identified imported medical goods also helps boost capacity upgrades tailored to attract international customers. India’s world-class but affordable treatment offerings make it price-competitive against regional low-cost competitors like Thailand, Malaysia, Turkey, etc.
However, the need for tax credits, complex registration requirements across states, and increasing compliance costs due to frequent tax amendments create operational hurdles for market participants. Obtaining clearances from customs and food safety authorities also delays procuring imported medical products for overseas patients. The lengthy processes undermine reputational gains from showcasing superior healthcare expertise. Policy corrections that simplify cross-border procurement of healthcare inventory would catalyze higher incoming medical tourist traffic.
GST and Healthcare Innovation
One of the main objectives envisaged in GST design was to encourage innovations and research activities by the Indian industry through a seamless flow of input tax credits. This aspect has particular relevance for the healthcare sector, where pioneering medical discoveries and therapeutic advancements directly translate into improved clinical outcomes that save precious lives and ensure healthier, productive populations.
Under GST rules, taxes on purchases of testing equipment, lab materials and related overheads are eligible for tax credits that significantly lower the costs of conducting experimental drug trials and developing biomedical devices. Technical advances have enabled the introduction of new-generation Medicare, previously inaccessible to Indian patients. Scientific progress also prepares our healthcare ecosystem to prevent and combat medical shock events like the COVID-19 pandemic.
However, complex registration formalities across different states, ambiguous classifications for new-age health gadgets, disjointed public procurement policies, inverted duty structures for imported medical electronics and lack of adequate tax exemptions have marred the promised innovation-friendly environment.
Startups working on ground-breaking healthcare solutions also need help with GST compliance burdens that divert bandwidth from managing core operations. Despite policy initiatives like tax refunds for R&D expenditure, cumbersome documentation and delays in actual reimbursement discourage smaller players.
Simplified registration options, harmonized rates between inputs and outputs, startup exemptions, and relaxing tax deductions at source requirements for entities focused on healthcare advances would provide the requisite impetus. The GST council needs urgent corrective action to remove ambiguities and ensure consistency to nurture a thriving ecosystem for impact-based healthcare innovation in India.
Conclusion
The goods and services tax has had a mixed impact on the various aspects of the Indian healthcare sector. Exempting all essential health services has enhanced potential access and affordability for vulnerable demographic groups. Moderate or low rates have also brought down taxes on most healthcare products. This is a significant structural shift that aligns with public priorities.
However, blocked input tax credits, complex registration procedures, ambiguous classification and legacy issues in procuring critical inventory still plague stakeholders like hospitals, diagnostic labs, doctors’ clinics, research centres and life sciences startups. This increases compliance overhead and operating costs, creating barriers against the intended goals of cost efficiency and standardized healthcare delivery across national markets.
Addressing these systemic frictions would magnify the savings passed on to patients even under current rate slabs. The government must also rationalize rates between health inputs and outputs to prevent cost build-ups. Expanding the zero tax bucket and providing clarity in definitions would remove key deterrents faced in medical tourism and innovation growth pursuits.
Despite some unresolved concerns, the GST regime reflects the proper spirit with its broad policy direction and emphasizes affordability and accessibility aims in healthcare. Its potential can only be unlocked through consistent policy fine-tuning that lowers implementation glitches for enterprises, enabling mass healthcare reach.
The GST council needs to view this as an ongoing exercise based on continual industry feedback. Timely course corrections would solidify India’s economic priorities in preventive care, cost-effective cures, and healthcare excellence.
Also Read: GST and the Healthcare Sector
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FAQs
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What tax rates are applicable for healthcare services under GST, and how does it make treatments affordable?
All direct healthcare services like doctor consultations, hospitalization, therapy, diagnostics tests, etc., provided by healthcare institutions such as hospitals, nursing homes, physicians’ clinics and pathology labs are exempt under GST. No tax is levied on medical care, making critical health interventions more affordable for citizens by reducing costs by 10%-15% compared to pre-GST rates.
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How is GST reducing the prices of medicines and making drugs accessible to larger sections?
Over 82% of medicines fall under the 12% GST slab, while essential drugs and vaccines are taxed at 5%. The lower tax incidence compared to the earlier 20-30% cumulative burden directly contributes 7%-15% cost savings for medical supplies. Medicines constitute over 70% of out-of-pocket spending for most Indians. More affordable essential drugs enhance access.
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What cost benefits does GST provide for medical devices and health equipment?
Customs duties on imported medical devices have been cut. Most assistive healthcare products sold domestically, including wheelchairs, stents, implants, etc., also fall under 12% or 18% GST – much lower than previous rates. This reduces hospital input costs and cuts end-user prices, making hi-tech treatment affordable.
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How does GST benefit health insurance providers?
By making hospitalization and drugs cheaper, total treatment costs covered under insurance claims get significantly reduced under GST. This lowers the claim outgo for insurers, allowing them to offer specialized coverage like OPD insurance at lower premiums. More affordable premiums enable wider insurance coverage penetration.
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What are the drawbacks of GST exemptions for healthcare organizations?
While no GST is charged on healthcare services, taxes paid on hospital procurement of equipment, chemicals, spare parts, etc., cannot be claimed as input tax credit. This increases working capital costs by 15%-25%, affecting healthcare infrastructure expansion projects or acquiring newer medical technologies.
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How can policymakers address the loss of tax credits by hospitals under GST?
Industry experts have suggested allowing deemed credit equivalent to 6%-10% of healthcare services revenue, which providers can claim against GST dues on equipment purchases, etc. This would offer some relief towards working capital losses without offsetting the savings transferred to patients.
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How does GST enhance India’s competitiveness as a medical tourism destination?
Low uniform GST rates reduced treatment costs and enabled private players to set up speciality infrastructure to tap into the global medical tourism opportunity. Advanced care at nearly one-tenth of the costs compared to developed nations has led to over 25% growth in overseas patient inflows since GST adoption, amplifying India’s credentials as a medical tourism leader.
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How can the GST system spur healthcare innovations?
By rationalizing duty structures for imported medical electronics, allowing R&D investment offsets alongside timely GST refunds and creating a nurturing environment for life sciences startups to flourish, India can become a hub for cost-effective healthcare innovations designed especially for Indian consumers.
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Does GST offer other collateral benefits for enhancing healthcare access besides affordability?
Uniform low rates and seamless input tax credit interpolation between states encourage players to expand across India. GST enables the creation of advanced healthcare capacity in metros and underserved semi-urban and rural areas to elevate access and quality closer to patient locations.
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What future policy changes can help maximize healthcare affordability under GST?
Lowering 28% GST rates for devices like powered wheelchairs, automated medication dispensers, etc, concessional rates for ancillary services like healthcare IT, logistics, and consultations, and rationalization of rate slabs for medical consumables in alignment with end product rates would magnify the savings benefits under GST to optimize healthcare affordability.
