GST in healthcare sector: hoping for positive impact

To make the Indian Tax system more uniform, Goods and Services Tax (GST) has been introduced in India from July 1, 2017. It has been hailed as the biggest tax reform since independence.

Parties on both sides of the political divide say it is a good initiative but may disagree on preparedness to implement and the rates on various goods. It will include all taxes at various stages of value addition in the production process of goods and services – that is buying raw material, manufacturing of components and final product, warehousing, and transportation and final sale to customer.

These taxes were levied by multiple authorities such as local (municipalities), state and central governments. The final customer will pay GST while purchasing from the last dealer. Thus, it is not a new tax but replaces all taxes which were levied at all the previous stages in production and sale process with one tax. Now there is one tax with two components - state components and central.

The state component will go to the state in which final transaction took place and the central component will go to central government. The GST is expected to increase the government revenue as tax evasion will be checked and many services that were not under the service tax regime will come under GST. The increase in government revenue will improve investment in health and the social determinants of health.

It will also provide transparency and certainty in the tax system. It will improve the ease of doing business. India’s current standing globally in ease of doing business is 130 out of 190 countries. Globally, GST is seen as a simple, efficient and successful form of indirect tax reform which will contribute to accelerate economic growth by replacing the current multiple, inefficient, irrational and complex indirect tax system in India.

Most of the countries (160) in the world, especially the ones with advanced economy have GST or similar tax system, some have been in place for more than 50 years. These include France (first to implement in 1954), China (1994 modified in 2016), Japan, Malaysia, Australia, New Zealand, Singapore and Canada. Globally, there are more than 40 models of GST.

India’s GST system is closer to that of Canada with two components (state and the centre). The countries introducing GST have faced short-term disruptions such as protests, inflation spikes, burden on small businesses etc, before the benefits start emerging.

India has four slabs of taxes (5, 12, 18, 28 and on some goods sin tax of 40%) where almost all other countries have only one slab. There is no doubt that GST is going to affect almost every sector of the economy in India, so the experts are trying to analyse their respective sectors and their growth under the umbrella of GST.

GST and healthcare sector: Healthcare is one of the fastest growing sectors of the economy with lots of potential in terms of revenue and employment. Healthcare is a wider term that mainly includes pharmacy, medical devices, medical insurance, diagnostics and other components of medical care. The GST is going to affect all the components of healthcare in various ways.

GST and pharmaceutical industry: About two thirds of the out of pocket expenditure on healthcare is on drugs in India. The burden of all the taxes on drugs in general was about 13% in the pre-GST period and the current GST is 12% as a whole including ayurvedic drugs. The medicines for HIV-AIDS, malaria, tuberculosis and diabetes will be imposed 5% GST.

The GST on drugs produced under excise-free manufacturing zone is yet to be clarified. The best thing for the pharma companies is that their cost of purchase is going to reduce. The GST will give hassle free business environment to the pharma companies.

GST and medical devices and equipment: The manufacturers of medical devices are also joining the party as medical devices and surgical equipment are proposed to be taxed 12% under the GST. The previous burden of taxes on the medical devices and equipment was over 13% including all the bunch of taxes.

So 1% tax benefit is visible under the new tax system for the medical device and equipment industry. This will clearly give a boost to the industry and the consumer will also share the benefits in terms of lower price and affordability.

GST and health insurance: There is lot of scope for health insurance in India where the coverage under health insurance is only 18% in urban and 14% in rural India in 2016. The GST rate on the insurance sector is 18% as against 15% service tax in the pre-GST era. It clearly indicates that the health insurance premiums are going to increase.

GST and diagnostics: There is an expected rise in the prices of diagnostics such as blood tests, X-rays, MRI and strip-based diagnostics as they are put under either 12% or 18% slab which is higher than the previous tax rate. In the pre-GST era, the 10-15% of out of pocket expenditure is on diagnostics which is expected to increase in the post GST period.

The GST will certainly increase the government revenue with more transparency in the tax system that will further simplify the tax structure. The economy is expected to grow at a faster rate. Every sector of the economy would have its share in the growth of the economy including healthcare sector.

In a broad spectrum, it is an analysing phase for the healthcare sector to see the impact of GST. The experts of the healthcare sector are confident that the post-GST period will bring in strategic change and create a positive environment by minimising the obstacles and complexities in the growth and have a positive impact to bring down the cost of health.

(Dr Sanjiv Kumar is Director and Dr Sumesh Kumar, Associate Professor at International Institute of Health Management Research, New Delhi)