7 minute read 18 Aug 2022
Health care services under GST

GST rate rationalization - road to an affordable Indian healthcare destination

By EY India

Multidisciplinary professional services organization

7 minute read 18 Aug 2022
Related topics Tax

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  • A study on embedded taxes in the healthcare sector of India

This may boost investment in the sector and offer high-quality output at affordable rates.

In brief

  • Embedded taxes are in the range of 5.5% to 6% of the total revenue of healthcare units.
  • It is also likely that the embedded tax rate on imports could marginally increase from 6% as they are procured through third-party agencies.
  • Essential medicines and life-saving drugs account for a major proportion of embedded taxes for hospitals and temporary solutions such as COVID-related waivers will not solve the problem.

The goods and services tax (GST) was a transformational tax reform that benefited sectors across the spectrum. However, the GST benefits eluded the healthcare services sector, as most healthcare services are exempt under the current GST regime and the taxes on inputs and input services procured by healthcare establishments cannot be set off against the exempt output services. The blocked credit which remains unutilized in the value chain becomes a cost and gets passed on to the end-user, raising the cost of healthcare services and diluting the government objective of making India an affordable healthcare destination.

Industry experts suggest that healthcare services should also be brought under the GST net, especially the private sector segments, so that the burden of taxes on inputs and input services could be relieved. In lieu of this, it becomes important to revisit the existing GST rate structure for healthcare services and rationalize the GST rate structure. Consequently, it might help in transmitting the cost benefits of GST and may also facilitate formalizing the healthcare segment further. However, to determine the appropriate GST rate structure for the healthcare sector, it may be important to estimate the quantum of embedded taxes which remains blocked in the healthcare value chain and gets loaded into the healthcare cost, raising it significantly.

With this objective, EY, in collaboration with the Healthcare Federation of India (NATHEALTH), studied the issue of embedded taxes in the healthcare sector covering two major segments - hospitals and testing labs under the healthcare establishment.

Key Insights

The embedded taxes for hospitals encompass the total GST amount paid by hospitals for procurement of their inputs to provide the output services, which are exempted from the GST and account for nearly 6 per cent on an average of their total expenses in a year. Nonetheless, across the three years, the embedded tax rate stayed at an average of 5.7%.

However, the average GST rate levied on the procurement of inputs over the past three years has been about 12 per cent on an average and has only been rising, indicating the rising share of high-rated GST bearing inputs as in the chart below.

Average GST rate incurred by hospitals

The GST bearing items procured by the hospitals form a sizeable amount and the average expenditure of such items stood around 40% in the last three years.

share of GST bearing expenditure for hospitals

The table below summarizes key GST bearings across hospitals.

Key GST bearings across hospitals

Likewise, diagnostic centers and testing labs face a multitude of inputs expenditure which bears GST. The following table shows some of the key input items purchased by diagnostic centers and testing labs along with the GST rate faced.

Key bearing GST inputs foe testing labs

Additionally, another critical component of the healthcare industry is contractual labor, which forms an important cost component for the healthcare sector as it is subject to GST at 18 % which is paid under the category of labor services. The lack of pass-through for these taxes disincentivizes hospitals and testing labs from hiring contractual labor.

To summarize, the average embedded taxes rate over the total revenues for hospitals stood at 5.7% for the period between 2018-19 and 2020-2021. Meanwhile, the average embedded taxes rate over total revenues for testing labs and diagnostic centers stood at 5.8% during the same post-GST period. The findings have been presented in the table below. 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 segments.

Comparison between Pre-GST and Post-GST embedded taxes rate

Thus, the above table shows that the healthcare services sector provides a unique case wherein the GST regime has not augured well for the service providers. In this context, a GST rate rationalization exercise is needed in the sector to overcome the embedded taxes problem. This would provide opportunities for healthcare service providers to invest in high-quality inputs to provide high-quality output at affordable rates to the end consumer.

In a nutshell, the way forward could be to maintain the status quo and healthcare services to be exempt from the GST regime. Alternatively, zero-rating is proposed which would reduce the burden of embedded taxes on the healthcare service providers. Another way is to levy a suitable GST rate on output services for all private hospitals and an optional dual rate structure may be given for government establishments. Lastly, the approach could also be an amalgamation of all the options, which may be decided based on the combination that minimizes the impact on end-consumer while reducing the embedded taxes burden on healthcare service providers. The study suggests neutralizing the increase of 1.5% at least post covid (in the GST regime). Below is the list of items that could be considered essential in reducing the embedded taxes burden on healthcare service providers.

HSN Code CBIC Description Rationale GST Rate (%) Suggested Rate (%)
3822 All diagnostic kits and reagents COVID-19 pandemic has brought to the forefront the importance of affordable testing related kits and important reagents required for testing and treatment. Thus, items under this HSN chapter may be considered for GST rate rationalization. 12 5
3004 Medicaments consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) Intravenous (IV) Fluids and Antibiotics are used extensively in treatment of severe illnesses. Bringing about affordability in these items through rate rationalization will help in reducing out-of-pocket expenditure in healthcare of the population. 12 5
9402 Medical, surgical, dental, or veterinary furniture (e.g., operating tables, examination tables, hospital beds with mechanical fittings, dentists' chairs), having rotating as well as both reclining and elevating movements; parts of the foregoing articles Without proper hospital furniture, such as reclining beds and chairs, operating and examination tables, hospitals and clinics cannot be set up. These lists of items are essential to delivering healthcare services. Thus, they may be considered for rate reduction. 18 5
9018 Instruments and appliances used in medical, surgical, dental, or veterinary sciences, incl. scintigraphic apparatus, other electro-medical apparatus and sight-testing instruments, n.e.s. Products Include: Disposable Surgical Face Mask Bringing affordable healthcare requires provision of ECG machine, Ultrasound machine, Echo Cardiograph, Syringes to tackle modern day diseases. This chapter includes several instruments considered to be basic requirements in both government and private hospitals, and therefore may be considered for rate reduction to reduce embedded taxes. 12 5
9022 Apparatus based on the Use of X-Rays or Of Alpha, Beta or Gamma Radiations X-Ray (Radiology) imaging devices are basic requirements for all hospitals and diagnostic centers, whether government or private. Meanwhile, advanced imaging devices, such as that for Mammography, are essential to the future of female health in India. Thus, items under this HSN chapter may be considered for rate rationalization. 12 5
9021 Splints and other fracture appliances; artificial parts of the body; other appliances which are worn or carried, or implanted in the body, to compensate for a defect or disability To bring about accessibility and affordability of implants, items in the given HSN chapter may be considered for GST rate reduction. This will reduce the embedded taxes burden on both government and private hospitals. 12 5
9972 Real estate services – Lease Rentals Under input services, rent constitute the highest embedded tax burden. Hence, lease rentals for hospitals with over 100 beds or at least 100,000 square feet area may be brought to a merit rate. This will help unlock infrastructure capital for the healthcare sector. 18 5

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The quantum of embedded taxes in the healthcare sector suggests how GST rates should be rationalized. It may be worthwhile to finalize the sectoral rates based on a study of the supply chain of inputs feeding into the sector where the GST rate is completely data driven.

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By EY India

Multidisciplinary professional services organization

Related topics Tax