Goods and Service Tax Health Care Service

Over seven decades, since Independence till June 2017, India had multiple indirect taxes levied and administered in a value chain by various Centre and State tax authorities.

In a pre-GST era, there was Central Excise Duty on manufacturing of goods, levied by Centre, Value Added Tax on sale of goods, levied by State and Service Tax on provisioning of services levied by Centre. Other than these key taxes, there were multiple sector and State specific taxes, surcharge and cess such as purchase tax, entertainment tax, luxury tax, duties under medicinal and toilet preparation Act, taxes on lottery, betting and gambling and surcharges and cess. Therefore there was a multiplicity of taxes as being levied on same supply system, and it had a cascading effect as there was not limited provision to set-off. Besides, there were non-tariff barriers like octroy, entry tax, check-posts etc

The Goods and Services Tax (GST), was implemented on July 1,2017, is regarded as a major taxation reform implemented till date in India. The primary objective behind implementation of GST is to subsume various indirect taxes in India like Central Excise Tax, VAT/Sales Tax, Service tax, etc. and implement one harmonised taxation system in India. This is in line with the government’s vision to have “One Nation One Tax”.

GST is a tax levied on supply of goods and services, at each stage of supply chain ranging from manufacture or import to the retail level.

By virtue of its design, GST is expected to broaden the tax base and improve the tax compliance.

It took the Government(s) around a decade, to get the tax reform (GST) onboard. In its making, we witnessed the lengthiest debate on its coverage and rates, followed by an amendment to Constitution of India.

While a majority of indirect taxes are subsumed under GST, the left out ones are Customs Duty, taxes on electricity, real estate, alcohol for human consumption, local body entertainment tax and some others.

Whereas, crude oil, diesel, petrol, natural gas and aviation turbine fuel are within the GST but the levy will be effective from a future date, to be decided by the GST council, a nodal body responsible for advising the Government on GST matters.

The GST based taxation system is poised to bring in better transparency in the overall tax administration,accelerating the growth rate in the country by checking corruption and tax evasion.

Under GST, there is a seamless transfer of input tax credit from one stage to another in the chain of value addition, which incentivize the inbuilt the tax compliance by the taxpayers.

GST has formally introduced the concept of ‘mixed’ and composite supply’, applicable only on domestic transactions which is particularly relevant for sectors, including healthcare, providing bundle of services.

GST is expected to harmonize and simplify the indirect tax regime. It is also projected to reduce the cost of production and inflation in the economy.

GST seeks to transform the Indian economy with its ‘One Nation, One Market, One Tax’ principle by subsuming a host of indirect taxes charged at varied rates by the Centre and states, therefore bringing uniformity in taxation across the country.

India’s GST has a multi-tier structure, with rate of tax varying from nil, 05%, 12%, 18% to 28% added by a compensation cess of up to 15% on certain goods.

With the implementation of GST, there is a paradigm shift in determination of tax liability, as there is a change in ‘tax incidence’.

Under the extant laws, each of the legislations had its own determination of tax incidence ranging from ‘manufacture’, to ‘sale’, to ‘provision’ of services. In GST, there is a uniform tax incidence that of ‘supply’. The term supply encompasses all its forms such as sale, transfer, barter, exchange, license, rental, lease or disposal etc. of goods and services.

The consolidation of indirect tax laws, is a major relief to taxpayers in India, as one is no more required to see multiple and respective tax incidences and compliances.

The Businesses can now expect a standard operating procedures across locations, as GST extends to the whole of India uniformly, including and as applicable to Jammu and Kashmir from 06th July 2017.

Healthcare as a sector, comprises supply of both goods and services. And, as we know, trading of goods was subjected to state-specific VAT and given the discriminatory rate of taxes and classification, the industry was wrestling with these state levies.

The vista of uniformity, emanating from the amalgamation of indirect tax laws, is likely to develop a sense of certainty among the taxpayers.

Beside goods, there is a substantial component of service delivery especially in hospitals and diagnostic centres. Perhaps, these two are known for their services only. Previously, a majority of services provided by hospitals and diagnostic centres were exempted from service tax. Objectively there is a continuance of exemption, less than expected, but a few remaining, which were subject to service tax, are witnessing a 3% tax inflation in this space due to increase in rate of tax from 15% (service tax) to 18% GST. This is more specific to procurements made by hospitals and diagnostic centres.

Globally, GST or VAT is conceived as a tax scheme with minimum exemptions. Contrary to this, India still has relatively more exemptions, which were to be carried forward in GST on the principal of equivalence.

Let us remember, the objective of GST was not to bring a new taxation, but consolidation of existing laws toimprove the administration, ease of doing business, and remove the cascading effect, among many other things. Therefore, objectively one can fairly expect that the overall rate of tax and benefits must not fluctuate with GST implementation.

The Government, in the interest of economy, had incorporated one of its kind provision under GST legislation to protect the profiteering of profits by the business and abuse of market forces on account of implementation of GST. The businesses are mandatorily required to pass the tax benefits to the recipient of supply, owing a reduced tax rate and availability of more input tax credit.

A National Anti-profiteering Authority (NAA) has been established by the Government to ensure that the benefits of increased input tax credits and reduced GST rates on goods and services are passed on to the recipient of supply.

It is no less taxing, to ever have a tax on healthcare and related services.

The price of any goods and services essentially contains:

• Cost of manufacturing or providing that goods and services
• Profit(s) of the supplier and
• Component of indirect tax charged on the supply of those goods and services.

To an extent the cost of manufacturing goods and/or providing services inherently has an indirect tax component, which is unknown to the customer (patient). Similarly, the case with the profits that the supplier makes in the transaction is not known.

Whereas, the last component i.e. indirect taxes is certainly known to the consumer and patients. Furthermore, there is always an assessment of the quality of goods and services provided with the tax component charged on the invoice. At time, the consumer understand, it (indirect tax) to be a burden, specifically the education and health, where it leads to rise in price that he pays for essential services.

GST provides for tax on ‘all’ supplies of goods and services, unless exempted.

The term ‘healthcare’ may take different meaning in different domains, and thus it is important to outline ‘healthcare’, for the respective purposes. This mandate under GST,has been fulfilled by a Notification issued on exemption where under ‘health care services’ are defined.

What are health care services, for GST?

The supply of health care services by following, is exempt from GST:

• Clinical establishment;
• Authorized medical practitioner and
• Para-medics

Health care services, as defined under the Notification1, means:

‘any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India andincludes services by way of transportation of the patient to and from a clinical establishment butdoes not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, development abnormalities, injury or trauma’

The definition is predominantly founded on three pillars that of Diagnosis, Treatment and Care, followed by coverage of transportation of patients. One would also observe theexclusion of ordinary cases of hair transplant or cosmetic or plastic surgery.

Key exemption under GST

Healthcare services by a clinical establishment, an authorized medical practitioner or para-medics, are exempt from GST. The patients are also saved from GST on services provided by way of transportation of a patient in an ambulance.

The benefits extends indiscriminately to diagnosis, treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India.

The ‘composite supply’ in healthcare

A composite supply, under GST, means supply (of goods and services)‘made by a taxable personto a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof,which are naturally bundledand supplied in conjunction with each otherin the ordinary course of business, one of which is a principal supply’

It is a prevalent practice amongst healthcare providers, to offer goods and or services together or in a package.

There has been long que of debate around the taxability of goods and services supplied together, and the jurisprudence as it evolved offers a cleavage of opinion on taxability, on a case-to-case basis, as to whether the transaction involves principal supply of goods or services.

Apart from the main healthcare services, the hospitals and diagnostic centres have to provide certain ancillary services such as room accommodation provided to in- patients, food supplied to in-patients as advised by the doctor or nutritionists, supply of medicines, stunts or implants during in-patient diagnostics, diagnostic and pathological tests etc.

The Government has clarified that the room rent of hospitals is exempt from GST, and treated different to that of rooms provided by hotels, inns and guest houses.

The Tax Research Unit at the Central Board of Indirect Taxes and Customs, had an occasion to clarify one the transaction in its Circular that ancillary services i.e. supply of meal to during in-patient diagnostics forms part of composite supply of healthcare and the supply of meal will not be separately taxable. It also clarified that other supplies of food by a hospital to patients (not admitted) or their attendants or visitors are taxable.

Accordingly, there could be numerous combinations and possibilities, to be examined on a case specific basis, for determination of principal supply in the transaction, followed by taxability or exemptions as the case may be.

A rise in healthcare cost, is a constant injury to its access. The growing incidences of catastrophic expenditure due to health care costs, are presently estimated to be one of the major contributors to distressed conditions for economically weaker sections.

India’s National Health Policy 2017, aims to attain the highest possible level of health and well-being for at all ages, through a preventive and promotive heath care orientation.

The National Policy further acknowledges that this goal would be achieved though increasing access, improving quality and lowering the cost of healthcare delivery.

One of the component in healthcare delivery is indirect taxes, and therefore it is pertinent to have a pro-healthcare tax structure to support the objectives.

An illustrative list of areas (injuries), which GST brings along is as under:

• Proportionate credit reversal – healthcare providers are required to reverse their input tax credit, if a part of their output goods or services is taxable and part exempt. The facility of input tax credit is not available in real sense.
• On import of devices by hospitals, there is a basic customs duty (BCD) followed by integrated tax (IGST). BCD is always non-creditable, however there are case where there is high IGST cost involved. This IGST paid sits as a cost in the books of the accounts for a healthcare provider.
• Presently, the tax concessions are largely post operationalization, however given the focus on development of healthcare and wellness centres, the transactions involving their setting up, construction etc. should also be considered for tax benefits, so that there is less cost of establishment.

International Experience and best practices

With the rise in globalization, and improved travel and communication access, we are bound to pay a visit to the international experience. A few of the advanced countries, provides state- sponsored health protection and generally incurs all the expenses to ensure your wellbeing.

Let’s see, how healthcare is subject to indirect taxes in select territories.

United Kingdom

India’s GST, from a healthcare sector perspective, seem to have a close tryst with United Kingdom’s VAT. The prevailing VAT rates in UK are 0%, 5% and 20%.

Under UK’s VAT, the healthcare services are defined as ‘the supply of services consisting in the provision of medical care’ Supply of healthcare services is exempt from VAT. Nursing, ambulance services and online healthcare services are also VAT free.

Likewise, hospital’s room rent, supply of medicines, implants etc. is exempt from VAT when supplied as part of a packaged supply of care or treatment.

The diagnostic centres also enjoy similar benefits as that in India, their supplies are VAT free. The doorstep sample collection and delivery of report does not make a difference to taxability.

Plastic and cosmetic surgery when carried out for a cosmetic reason rather than to treat a medical or psychological condition, is taxable at the standard rate of VAT, 20%.

The complications under India’s GST and UK’s VAT are also comparable and the businesses providing both taxable and exempt goods and services, can avail only the proportionate input tax credit.

Singapore

Singapore implemented its GST in 1994, when India attempted to tax service sector for the first time. There is a standard 7% GST on healthcare services (including the medicines and products). There is no relief from GST. The taxability applies uniformly to a Singapore resident or a foreign person.

Possibly the simplest indirect tax regime, and without concessions, operating in a relatively small jurisdiction.

Philippines

Under the Tax Code, performance of medical, dental, hospital services are considered exempt from VAT, except if rendered by professionals. Further, the tax on room rent is considered as part of hospital services, is exempt from VAT.

The term ‘healthcare services’ unlike India, is not defined in the Philippines Tax Code, but was decided by the Philippines Court of Tax Appeals in Perpetual Hospital v. CIR, hospital service “includes not only the services of the doctors, nurses and allied medical personnel, but also the necessary laboratory services, and making available the medicines, drugs and pharmaceutical items that are necessary in the diagnosis, treatment and care of patients”.

Presently the sale of drugs to a hospital’s in-patients is VAT exempt because the sale forms part of the term “hospital services”. And, the new tax code to be implemented from January 2019, Moreover, proposed to exempt sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension, without distinction if whether the sale is IPD or not.

Contrary, online-consultancy and doorstep diagnostic services (sample collection), which are treated as healthcare services in India, and thus exempt, are not treated as part of healthcare services and therefore taxable in Philippines.

GST Rates Applicable in Various Countries    

Name of Country	GST Rates (in %)
Netherlands	21%
United Kingdom	20%
France	20%
Germany	19%
India	0%,5%,12%,18% and 28%
Russia	18%
China	17%
Pakistan	17%
Mexico	16%
New Zealand	15%
Australia, Brazil, Indonesia, Korea	10%
Japan, Switzerland	8%
Thailand, Singapore	7%
Malaysia	6%
Canada, Jersey	5%