In the recently concluded 47th GST Council meeting, among the other decisions taken, a mini rate change exercise was approved with the objective of phasing out exemptions and correcting the inverted duty structure.

One of the rate change decisions was the imposition of a 5 per cent GST on hospital rooms (excluding ICU) with a rental value above ₹5,000 per day without the facility of the input tax credit. While this measure may look innocuous, it distorts the design of the GST and imposes an additional tax burden on the healthcare sector. The services in the hospital rooms are an intermediate input feeding into the overall healthcare services that are currently outside the GST net.

Therefore, levying a 5 per cent GST rate on hospital rooms raises the embedded tax burden in the healthcare sector impacting affordability which is a key objective of the National Health Policy.

In a country like India, which has a significantly high share of out-of-pocket expenditures in total healthcare expenditure at more than 60 per cent, affordability of healthcare services becomes extremely crucial.

Embeded tax

A study by EY for NATHEALTH recently released by the Union Health Secretary shows that the healthcare sector carries an embedded tax burden of nearly 6 per cent of the annual turnover. The healthcare sector is also one of the few sectors where the embedded tax burden post-GST is higher than the pre-GST period mainly due to limited pass-through available to the inputs under the earlier state VAT regime.

Therefore, the rate rationalisation of hospital rooms, which is an intermediate service for the healthcare sector, should have been done by taking a holistic view of the healthcare sector as a whole rather than picking out one individual segment.

In fact, such a sectoral view should have been considered after the final recommendation of the Bommai Committee whose current term has been extended by the GST Council for a further period of three months.

The other important point is that the backward linkages of the healthcare sector to input goods, input services and intermediate services and the forward linkages to the insurance sector should have been considered in an integrated manner for rate rationalisation decisions. Now, uniquely, hospital rooms stand isolated in the healthcare value chain with this segment unable to claim input tax credits nor able to offset this tax against taxes in the healthcare segment as the latter is exempt from the GST. Such isolation of important intermediate services in the healthcare sector is against the very design of the GST.

Therefore, it would be prudent that the currently approved GST rate on hospital rooms is kept in abeyance as in the case of the textile sector and considered only after the final recommendations of the Bommai Committee are received. There is also a need to examine this in the background of the holistic view of the healthcare sector, which plays a crucial role in the economy, and underscored during the recent Covid-19 crisis.

A holistic approach to GST on hospital rooms will also send the right signals to foreign investors who value certainty in taxation and policy changes .

Finally, it is important to understand that phasing out exemptions is a laudable objective provided the exemption being phased away is on the final product.

In this case, the exemption being phased out was an intermediate service going into the final service product (healthcare services) which is currently exempt from GST, therefore accentuating the embedded tax problem. The government should consider this distinction prudently.

The writer is National Leader, Tax & Economic Policy, EY India. With inputs from: Deepraj Pathak, Senior Manager, Tax & Economic Policy, EY India; and Shambhavi Sharan, Senior Consultant, Tax & Economic Policy, EY India. (Views expressed are personal)