The introduction of Goods and Services Tax (GST) has not rationalised the average embedded tax on hospitals and diagnostic laboratories, but instead increased it further, an analysis carried out by global consultancy EY suggests. While the embedded taxes rate of hospitals increased from 4.3% in 2016-17 to 5.7% in the GST period, it went up from 3.8% to 5.8% for diagnostic centres and testing labs for the period between 2018-19 and 2020-21.

The analysis done by EY in association with industry body Nathealth (Healthcare Federation of India) indicates that essential medicines and life-saving drugs account for a major proportion of embedded taxes for hospitals.

“While the average rate of embedded taxes is quite similar for hospitals and testing labs, the inputs leading to blocked input taxes are different for both these segments. For instance, hospitals incur higher expenditure on medicines (both general and lifesaving) as well as contractual labour for cleaning, maintenance and repair services of hospital facilities. Hospitals on an average hire more contractual labour in comparison to testing labs, on which they incur a GST rate of 12-18% depending on the nature of the contractual labour hired. This trend was observed across hospitals. Meanwhile, testing labs incur high expenditure on chemicals, reagents and kits to cater to the high volume of testing demand emerging in India. Testing labs also have higher marketing expenditure as compared to hospitals,” the report said.

A breakup of the GST bearing expenses for hospitals found that 47% of the tax component can be attributed to medicines. Contractual labour expenses were 28% and instruments and appliances accounted for 12%. In the case of testing laboratories, consumables and reagents accounted for 44% to 75% of the total GST bearing expenditure. Rent (14%) and computer services (8%) were some of the other components.

The report suggests that in order to rationalise effective GST rate on healthcare providers, the government should either exempt the sector from the GST regime or introduce zero rating on healthcare services. It also wants the commission set up by the GST council to look into rate rationalisation and recommend the reduction of GST rates for some specific services. Diagnostic kits and reagents, various medicaments, medical, surgical or veterinary furniture, instruments and appliances used in healthcare services are some of the product categories that have been suggested. A uniform 5% GST instead of the current 12% and 18% rates is what has been proposed.

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