The Role of Tax policies on the Healthcare System in India and its Impact on Medical Professionals
Abstract: The healthcare system in India, plays a significant role in the welfare of society and is also a major source of revenue generation and employment in the country. The medical sector is greatly and intricately affected by the country’s taxation policies. In the past few years, the healthcare sector in the country has developed significantly and exponentially, and this growth has also led a wider scope for medical taxes. This paper aims to investigate and analyse the multidimensional impact of the Indian tax policies on the healthcare system, and how it influences medical infrastructure, accessibility, and financial viability for both, the public as well as the private healthcare practitioners. India’s extensive taxation structure, holds a significant influence over the healthcare system in terms of the cost-effectiveness of medical equipment and machinery, operational and healthcare expenses, and other essential medical goods. This complex tax regime, which incorporates the Goods and Services tax (GST), along with other corporate taxes and tax exemptions, considerably impacts its implementation and functioning. The presence of tax exemptions for the healthcare sector, including essential medicines/drugs; even though aims to reduce the financial burden on patients as well as on medical professionals, its enforcement comes with many challenges, due to the pre-existence of various complexities in the tax policies.
Operational costs and capital investment bear significant brunt due to the presence of these issues. Additionally, the concept of indirect taxes on healthcare-related goods raises the treatment expenditure, which ultimately puts a restriction on accessibility to quality healthcare, particularly amongst the economically challenged and lesser privileged sections of the society.
This research paper also explores and highlights the broader implications of the present taxation policies on the healthcare providers and institutions; such as the influence on the pay of the medical professionals, quality of medical help, as well as innovation. The paper delves into, and aims to critically analyse how the growing population and development affects the implementation of tax upon the medical sector, and how tax reforms can be brought to improve the current state of the healthcare system and give way for reduced disparities and increased accessibility, while strengthening the foundation of the medical system in the country, with aims to positively align these goals with the fiscal policies of India.
Key Words: Healthcare, Tax system, medical professionals, pharmaceutical goods, indirect taxes
Literature Review:
Taxation and Healthcare in the Global Context:
The existence of Tax policies plays a vital role in influencing the healthcare sectors worldwide, with different countries adopting and implementing various models that either make the tax system easier and accessible for the people or a heavy burden in context of healthcare services. In the United States, there exists a privatized system of taxation, where such policies incorporate incentives for private healthcare insurance, this is in complete contrast with the policies existing in the United Kingdom’s National Health Service (NHS), funded through general taxation. Scandinavian countries, known for their robust public welfare systems, impose high taxes but provide universal healthcare coverage with minimal direct costs to citizens[1]. In this context, India’s healthcare system stands out as unique due to the coexistence of public and private sectors, both of which are impacted differently by tax policies. India’s taxation system, particularly with the introduction of the Goods and Services Tax (GST) in 2017, plays a crucial role in shaping healthcare costs, accessibility, and infrastructure development.
♦ The Indian Tax Structure and its Impact on Healthcare
The Indian tax system has seen certain vital changes, now that the concept of goods and services taxes has been introduced in the country. This is a system where there exists an organised tax which aims to streamline the implementation indirect taxes across various sectors, including the healthcare sector. The healthcare sector, over the years, has seen some significant growth and in spite of it being a crucial aspect of the country, it has faced quite a few challenges in enjoying the benefits of GST[2]. This is mainly due to a lot of components being exempted from being taxed. These exemptions, although were given with an intention to relieve the patients from excessive treatment and medicine costs, has in a way, led to the creation of more burdens on the medical professionals. Many reports indicate towards the fact that medical institutions like, the hospitals, are unable to claim the input tax which are to be paid on important and vital healthcare/medical services. This has ultimately led to the expenditure of such inputs being passed on to those who are seeking medical treatment. Ironically, these exemptions which were given in order to provide relief, has led to more financial burdens. Research has also shown that the increasing cost in the healthcare sector due to these tax complexities, the burden of expenditure, is more on the private institutions, which usually are the ones involved in providing more high-tech treatments and medical equipment.
In addition to this, the effect of GST on the import of medical equipment, attracts increased tax rates which further leads to more difficulty with regards to the already heavy cost burden. One major issue with the existing tax policies, is the lack of organisation, which raise unnecessary complexities in its implementation and knowledge, making an essential aspect like healthcare inaccessible for many across places, causing difficulty for the medical professionals as well. According to various reports, including those given by Federation of Indian Chambers of Commerce & Industry (FICCI) and industry experts, have called for a re-examination of the goods and services tax rate; in order to maintain a balance between state’s development and the financial burden such taxes would have on the medical sector as well as those who are seeking medical treatment.
♦ Tax Reforms and its influence on the Medical Professionals:
The enforcement of tax reforms such as the goods and services tax has led to profound implications and influence on the medical professionals, particularly those who are engaged in private practice. Medical professionals face the brunt of higher operational costs due to GST being levied upon medical equipment, supplies, and services, while they remain unable to offset these costs due to exemptions on healthcare services. Studies show that private practitioners and small-scale hospitals face critical problems due to these tax-related challenges, as they lack the financial backing that comes from larger corporate hospitals. This tax burden has led to increased consultation fees, thereby reducing affordability for patients, and indirectly affecting healthcare accessibility.
Furthermore, papers on taxation policies existing in and for the healthcare sector, especially for the healthcare professionals’, shed light on the issues related to tax deductions and other professional expenses, which are not adequately addressed under the current tax framework. According to certain experts, it is suggested that the government’s incapacity to provide tax exemption to healthcare workers, especially those in the rural areas, further increases the problem of healthcare accessibility.
While there is extensive literature on the broader implications of GST and indirect taxes on the healthcare system, there are several gaps in the current research. For instance, there is limited focus on how tax policies affect rural healthcare facilities, which often operate with fewer resources and cater to a more economically disadvantaged population. Similarly, there is a lack of empirical studies on the long-term effects of GST on innovation in the healthcare sector, particularly regarding investment in advanced medical technologies and research. Future research could also explore the potential of tax reforms to enhance healthcare accessibility in underserved regions.
Research Methodology:
This research paper critically analyses the existing legal tax frameworks in India’s healthcare system. This analysis helps in understanding how the existing tax regime, the Goods and Services tax in particular, along with other indirect taxes, are applicable on the healthcare sector, along with their legal interpretation, through judicial rulings.
In order to write this paper, the authors did a thorough study and analysis of the present Indian tax structure, majority of which are focused on GST, corporate taxes and custom duties imposed on medical equipments and other services.
We also reviewed relevant case laws like Cipla Ltd. v. Commissioner of Customs and Vikas Sales Corporation v. Commissioner of Commercial Taxes, to understand the legal disputes over tax implementation in the medical sector, through empirical research and quantitative data collection in order to gather the burden on the healthcare system, caused due to the present tax structure.
Therefore, the authors used empirical research, quantitative data collection and legal analysis to achieve the research goals of the paper.
The Healthcare system in India:
In the recent years, the healthcare system in India has become one of the most revenue-generating sectors. This growth has also witnessed a positive rise in the employment levels in India. The healthcare sector comprises of many elements like, hospitals, clinical trials, outsourcing, medical devices, medical tourism, health insurance and medical equipment[3]. All these elements together help in the overall growth of the medical system.
The country’s healthcare system is categorised into two main components –the public sector and the private sector. While the public sector aims to provide more accessible and cost-effective services, especially in the rural areas, the private sector includes specialised and high-tech, advanced medical equipment and treatment to its patients. Nevertheless, both these sectors consist of dedicated and highly-skilled professionals.
A well-functioning healthcare system, is the backbone of any society and reflects a country’s overall welfare. In the case of India, significant changes have been seen since the Covid pandemic that has helped it in improving its medical services, and in becoming more efficient and accessible to the general public. These changes though, have also been seen in the taxation policies affecting the healthcare system.
The tax framework in healthcare in India:
The Goods and Services Tax (GST) was a transformational tax reform which benefited the sectors across the spectrum. However, the benefits of GST have by and large eluded the healthcare services sector as majority of healthcare services are exempt under the current GST regime. One of the important objectives of GST scheme was to ensure free flow of input duty credit across the value chain. In view of this, a large number of exemption notifications were reviewed at the time of the implementation of the GST (including 299 Central exemptions and over 90 State exemptions). Thereafter, a significant number of exempted items were brought under the GST net. However, important elements in the medical sector are mentioned in the exemption list. This was process was done under the impression that most of the medical institutions would not come under the goods and services purview, and hence would be exempted from a lot of complicated procedures like the filing of returns, or even the basic procedure like registration for GST. These initiatives, rather had an adverse effect, and because of this, the main intention why GST was introduced, which was to promote easier and swifter tax mechanisms, got restricted, leading to more complications, in an already complicated tax regime[4]. Ultimately, the inputs received by the medical institutions on medical equipment, labour and the maintenance of medical equipment, housekeeping, and rental services, etc., took the majority brunt of the GST liability, but these taxes could not be set-off against the output tax burden because the output medical services were relieved from paying GST. The restricted credit which remains unused in the value chain becomes an expenditure and gets passed on to the end of the chain, to the last user, raising the cost of healthcare services and thereby dissolving the government’s objective of making the country more accessible and affordable in terms of its healthcare.
With this backdrop, it is essential to analyse the existing GST rate structures presently applicable on the medical sector, in order to determine the most ideal rates, which would not only be beneficial, in cost profits for medical professionals, but also help organise this structure formally, to further the healthcare sector growth.
Indirect Taxes and impact on healthcare
Since the year 2022, the healthcare system has been included in the purview of the goods and services tax. These steps were taken in order to reorganise the present tax policies, in this rapidly growing industry, although it is still important to understand exactly what from the medical sector is included within the ambit of GST. Listed below are the subjects exempted from tax being levied in the healthcare structure[5].
- Emergency transport services (Ambulance): Such services provided is not eligible for being taxed under GST.
- Inpatient Services: This incorporates fees for consultation, general check-ups, charges levied on operation theatres and hospital beds and medicines provided to the patients while admitted. (It is notified that, hospital rooms costing more than Rupees 5000 per day, are eligible for being taxed at 5%)
- Veterinary Clinics: Goods and services tax is not levied upon treatments of birds or animals.
- Blood Banks: Preservation of stem cells in blood banks, is exempted from the ambit of GST.
The initiative to exempt certain components of the healthcare sector from the purview of GST, is a crucial step taken to make sure that the patients who are already going through both physical and mental turmoil and hardships, are not further burdened with an additional system of complex taxes. These exemptions ensure that healthcare services are more accessible and affordable for patients, especially, the lesser privileged people. This system of only taxing core medical services is also beneficial for patients who are undergoing long-term treatments for diseases like cancer, haemorrhage, stroke, dialysis etc.,
- Negative impact of such tax exemptions:
Within the present tax scheme in the country, there exists a vital concept of “Input Tax Credit” (ITC). The denial of which. Hospitals and healthcare service providers cannot claim ITC on input services such as medicines, medical equipment, consumables, and other services such as maintenance, utilities, etc., because they are relieved from charging goods and services tax on services like output services. This, ultimately leads to an increase in the operational costs in the healthcare system. Consequently, hospitals and other medical institutions along with healthcare facilities end up absorbing GST on their purchases (inputs), making the healthcare sector less efficient and potentially raising costs indirectly.
- Increased expenditure on Medical Equipment and Essential Drugs:
It is imperative to understand that, even though the vital medical services are exempted under this ambit. Services such as, medical equipment, medicines, etc., are still taxed under GST. This leads to increased operational costs for the medical institutions, like the hospitals and clinics, which then ultimately can be passed on to patients in the form of increased treatment costs.
- Higher Operational Costs for Private Institutions:
Private medical institutions are at the risk of facing the brunt of the constantly rising operational expenditures due to the incapacity to claim input tax credit, on infrastructural development, equipment purchases, and other essential outsourcing services, which includes services such as housekeeping, maintenance, security, etc. These steps can help disincentivize investments in the realm of private healthcare, especially for the smaller and medium scale hospitals/clinics that face challenges when absorbing the aforementioned costs.
- Complicated Tax Compliance:
Even though, medical services are exempted, medical professionals still need to systematically manage complicated tax compliances for those sections that do not come under the purview of exemptions provided. For instance, the rent for hospital rooms, which are beyond a certain limit, may attract GST. It is important that the hospitals correctly differentiate between the taxable and exempt services, which if unchecked, only adds to the already severe administrative burdens and difficulty in filing taxes.
While the positive influence of these tax exemptions has helped the general public, in making the taxation policies less complicated and more accessible, it is also vital to not turn a blind eye to the challenges it has created in terms of inefficiency in terms of operational services, caused due to the restricted input tax credits. Taking into consideration the above mentioned positive and negative aspects of the exemptions provided to the healthcare system under the current tax structure, it is very important to strike and maintain a balance in order to create smooth and accessible tax processes. In order to achieve this, the government may also have to rethink the existing tax policies, where a system of providing partial exemptions or revised GST rates instead of providing complete exemption for healthcare services. This would allow for the medical institutions to hospitals to claim the input tax credit, which subsequently would lower their costs and allowing for a smoother flow of investments for further development in the healthcare sector. There are instances where tax exemptions on particular categories such as the basic drugs/services affect the cost of those categories. These exemptions, in this case, help reduce the cost burden on healthcare providers and hence promote an increased supply and distribution of essential goods. This, in turn, may facilitate patients in accessing these items at a lower price and providing them with added availability. However, some considerations are to be made concerning the capacity of tax exemptions to any evidence of abuse, tax exemptions and incentives may reputably be exploited by dubious persons and organizations, resulting in wasted potential revenue and negatively altering the landscape. Also, when they are not carefully put into consideration, the above-mentioned features create worsening situations where inequalities in healthcare system access are magnified. This is because tax incentives may only aim to market unnecessary technologies to the healthcare market rather than necessary revolutionary ones. Tax breaks can lower costs for providers of healthcare, and can thus also encourage investment to improve facilities, equipment, and services. However, taking breaks must be accompanied by prices or improved quality for the healthcare provider to transfer to the patients; otherwise, we might have to think of strong measures to discourage them.
Judicial Rulings:
Cipla Ltd v Commissioner of Customs 2007(122) ECC433[6],
This case revolves around the imposing of customs duty on the import of essential as well as life-saving drugs along with medical equipment by the medical institutions. It was contended that the corporation, Cipla Ltd. that the medical equipments should be relieved from taxes being levied upon them, from the ambit of custom duties as according to them, it has a direct effect on the accessibility to healthcare.
The court ultimately passed a judgement in favour of Cipla Ltd, and held that essential or life-saving drugs, do not fall under the ambit of customs duty, and hence, should be exempted from it. Hence, this decision given by the court, sheds light on how the taxation system should support affordable and accessible healthcare system in the country.
Vikas Sales Corporation v. Commissioner of Commercial Taxes AIR 1996 SUPREME COURT 2082[7]
This judgement given by the Supreme Court answers the question of whether or not sales tax exemptions should be levied upon equipment and services which are sold to the medical professionals. The Apex Court passed a judgement clearing that while certain goods or equipment used in the medical services may be exempted from the ambit of sales tax, this relief is not applicable to every good used by medical practitioners. This judgment provided a clarity on which equipment or services fall under the criteria for tax relief under the healthcare sector.
Fernandez Foundation v CIT-[2022] 145
The aggrieved assessee filed an appeal before the Tribunal. The tribunal determined that the assessee was previously known as “Fernandez Hospital Pvt. Ltd.,” and after conversion, it is now known as “Fernandez Foundation.” There were no changes in the activities, management, location of services, or the charges for patient treatment. A mere change of the assessee’s name will not make it eligible for claiming an exemption if the assessee continues to charge the patients at market rates even after such conversion.
The assessee could have indulged in any kind of charitable activity, like reducing the profit element while rendering services or utilizing the profit incurred for helping the needy persons free of charge. No such activity was conducted by the assessee during the period. Moreover, the assessee had provided free treatment or concessional treatment to the patients, which was less than 1% of the revenue. Thus, the CIT was justified in denying registration/approval under sections 12AA, 10(23C) (vi), and 80G(5)(vi) to the section 8 company.
Recommendation and Conclusion:
The complicated yet essential relation between the Indian tax system and its healthcare sector has extensive effects on the accessibility, quality of service and affordability of healthcare. This research aims to demonstrate that although the introduction and enforcement of the Goods and Services Tax (GST) was done with the intention to bring about comprehensive reforms in order to simplify and organise the current tax regime, it has also, ironically raised the financial burden on medical institutions as well as the medical professionals, which at the end adversely impacts those who are seeking treatment, i.e., the patients. The relief of certain aspects of the medical sector from the ambit of GST, was although done with good intentions it subsequently led to input tax credits being restricted, and consequently resulting in increased operational costs for the medical professionals. These extra expenditures costs are often passed on to the vulnerable patients, henceforth, contrasting the government’s goals of making healthcare affordable, especially for the lesser privileged people in the country.
Through a thorough analysis and examination of the present judicial rulings/judgements as well as the legal frameworks, it is clear that the relief provided under the tax system under the healthcare services are not enough to fight the other challenges provided in the subject. Which ultimately leads to increased expenditure for crucial medical equipments and services. In the judgements given in the cases of Cipla Ltd. v. Commissioner of Customs and Vikas Sales Corporation v. Commissioner of Commercial Taxes, showcases attempts of the judiciary to give recognition to the financial issues caused by these tax schemes. But, through these cases, we also see the need for more clearer perspective on such an important subject.
To conclude, the existing tax system, though structured to relieve the medical sector from any further financial strains, have had rather adverse effects as it restricted the accessibility to a more cost-efficient mechanisms such as the input tax credits. This paper aims to highlight the urgent need for the policy-makers to revise the existing tax structure, with a view to harbour and create an environment ideal for the growing healthcare sector, one that aligns much better with the requirements of both healthcare practitioners as well as the patients, while also making sure the long-term sustainability of medical institutions.
BIBLIOGRAPHY:
Websites:
- IBEF: Healthcare Industry in India
https://www.ibef.org/industry/healthcare-india
- EY: A study on embedded taxes in the Healthcare sector of India
file:///C:/Users/keiar/Downloads/ey-nathhealth-march-2022%20(2).pdf
- Jain & Associates: How GST shapes the cost of healthcare sector in India?
https://njjain.com/how-gst-shapes-the-cost-of-healthcare-in-india/#:~:text=Clinical%20Establishments%20and%20Authorized%20Medical,tests%20conducted%20within%20clinical%20establishments
Reports:
- FICCI, Impact of Goods and Services Tax on the Indian Healthcare Sector (2020).
Articles:
Taxation in India and Its Impact on Healthcare, 15(2) Ind. J. Health Policy 56, 63 (2021)
Cases:
- Cipla Ltd v Commissioner of Customs 2007(122) ECC433
- Vikas Sales Corporation v. Commissioner of Commercial Taxes AIR 1996 SUPREME COURT 2082
- Fernandez Foundation v CIT- [2022] 145
[1] FICCI, Impact of Gods and Services Tax on the Indian Healthcare Sector (2020).
[2] Taxation in India and Its Impact on Healthcere, 15(2) Ind. J. Health Policy 56, 63 (2021)
[3] IBEF, https://www.ibef.org/industry/healthcare-inda (last visited 20th Sep, 2024)
[4] EY, file:///C:/Users/keiar/Downloads/ey-nathhealth-march-2022%20(2).pdf (last visited 20th Sep, 2024)
[5] N.jain and Associates, https://njjan.com/how-gst-shapes-the-cost-of-healthcare-in-india/#:~:text=Clinical%20Establishments%20and%20Authorized%20Medical,tests%20conducted%20within%20clinical%20establishments (last visited 21st Sep, 2024)
[6] Cipla Ltd v Commissioner of Customs 2007(122) ECC433
[7] Vikas Sales Corporation v. Commissioner of Commercial Taxes AIR 1996 SUPREME COURT 2082
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BY: Keiara Vidyarthi & Gazal Sachdeva
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