Industry call for rationalizing GST on diagnostic kits, x-ray equipment
The Goods and Services Tax (GST) has drastically changed India’s taxation system, aiming to simplify processes and encourage compliance. However, its impact on the healthcare sector reveals challenges that require immediate attention. Despite healthcare services being largely exempt from GST, healthcare providers face mounting operational costs due to the embedded nature of taxes and the limited availability of input tax credits in this respect.
Rationalising GST rates across the sector is thus crucial to addressing these challenges, ensuring affordability, and fostering sectoral growth.
The embedded tax burden
One of the primary challenges concerning the healthcare sector today is the embedded tax on input goods and services as part of GST, which disproportionately affects the healthcare providers in the country. As per a study conducted by EY, hospitals incur embedded taxes amounting to as much as 6 per cent of their turnover, significantly higher than the 4.3 per cent pre-GST burden. This increase stems from the inability to claim tax credits on essentials like medical equipment(s), medical devices as well diagnostic tools which are taxed at rates of 12-18 per cent, a cost that hospitals must either absorb or pass on to their patients.
This structural issue drives up the cost of healthcare delivery, thereby adversely impacting affordability on the part of the patients. In a country where out-of-pocket expenditure accounts for roughly 63 per cent of the total healthcare spending, compared to merely 18 per cent globally, these inefficiencies exacerbate the financial burden on both providers as well as consumers.
High GST rates on medical inputs
The current GST regime applies steep taxes to critical healthcare inputs. Items like diagnostic kits, X-ray equipment(s) and hospital furniture are taxed between 12 and 18 per cent. Meanwhile, essential drugs and consumables, such as intravenous fluids and blood reagents, also attract 12 per cent GST.
This taxation affects hospitals’ ability to maintain operational efficiency and denies them the benefits of seamless credit flow, a critical component of GST for other sectors and a rationale usually used for the transition from VAT to GST. Rationalising these rates to a uniform 5 per cent, therefore, would significantly reduce operational costs, making healthcare affordable for all.
Government’s GST mandate on hospital room rents
The government has mandated GST on hospital room rents exceeding Rs 5,000 without extending input tax credit (ITC) benefits. This sets a precedent that could be expanded to all healthcare services, enabling a seamless flow of credit as originally envisioned under the broader GST framework. Alternatively, the ITC could be allowed on significant expenditures like AMC, rent, and other major costs while harmonising all input tax slabs in healthcare to a uniform 5 per cent. Additionally, the government should remove the GST and customs duty on cancer care across the board, particularly on high-end radiology equipment and essential consumer goods, to reduce the financial burden on patients and healthcare providers.
Challenges with healthcare infrastructure
Building and expanding healthcare infrastructure faces similar challenges. While healthcare services are exempt from the GST imposition, inputs like construction materials and medical machinery are taxed, driving up initial capital costs. For instance, hospitals and diagnostic labs demand massive investments, much of which becomes unrecoverable under the current system. This deters private investment(s) in healthcare infrastructure, particularly in underserved and rural areas.
Moreover, the GST imposed on hospital rentals further increases operational costs, discouraging private sector engagement and stalling infrastructure development. Given that India has only 0.55 hospital beds per every 1,000 people—which is far below the WHO norms of 3.5 beds (per every 1,000 people)—these systemic inefficiencies severely constrain healthcare access.
Policy recommendations
The healthcare sector’s GST-related challenges call for targeted reforms. However, the following measures would alleviate financial burdens while ensuring better service delivery:
Reducing GST on Medical Essentials: Lowering GST rates on essentials like diagnostic kits, hospital furniture as well as medical equipment to 5 per cent shall help streamlining costs and improving affordability.
Input Tax Credit Reforms: Allowing full or partial tax credits to healthcare providers would help mitigate the embedded tax burden, thereby ensuring efficiency across the value chain.
Exempting Hospital Rentals from GST: Removing GST on hospital rentals shall help attract private investments, enabling faster infrastructure development.
Support for Smaller Establishments: Reducing compliance-related complexities and introducing incentives for smaller hospitals and diagnostic labs may ensure equitable and regionally distributed growth in the sector.
Way forward
As understood, rationalising GST rates is therefore not just a financial reform but a social investment into India’s future. The sector’s growth potential in this respect is immense, estimated at a whopping $372 million by 2022 and expanding further due to medical tourism and health-tech innovation. Addressing embedded tax inefficiencies and reducing costs shall not only make healthcare more affordable but also attract investors available globally and improve public healthcare outcomes.
In conclusion, aligning GST policies with the needs of the healthcare sector is crucial for achieving universal health coverage and fostering economic resilience. By adopting rational tax structures and ensuring seamless credit flow, India can build a more inclusive, robust, as well as sustainable healthcare ecosystem. Therefore, the time to act is now, for a healthier and wealthier India. News18
