Within weeks, pre-budget pleas have turned to post-budget protests. The healthcare sector is up in arms with the Government over the levy of service tax on all air-conditioned health care services as are branded apparel manufacturers over the apparent after-thought of the Government to deem them manufacturers and impose a nominal duty of 1 per cent. Indications are that the Government would re-think on the service tax on healthcare but ignore the request for reconsideration of the excise duty on branded apparel.

Healthcare industry & Service tax

The healthcare industry argues that India spends an inconsequential amount of its GDP on health-care and hence imposition of a tax would cause more damage. Such economically inclined arguments seem unnecessary to get the levy removed. The Government has been cherry-picking services to be taxed since 1994 and has been taxing them, exempting them and providing abatements all at will. The goods transport industry has a 3-0 record with the Government on the levy and administration of the tax on their services.

Healthcare was introduced as a taxable service a couple of years ago by levying the tax on cosmetic or plastic surgery that is done for reasons other than congenital defects, development abnormalities, degenerative diseases, injury or trauma. Without saying so directly, the target appeared to be the glam brigade that indulges in Botox treatment. Budget 2010 continued the exemption for cosmetic or plastic surgery by thinking of the remote possibility of cosmetic or plastic surgery being undertaken in a hospital within an airport premise and exempting them. When health check-ups were brought into the tax net last year, it came with a ready-made tax planning device since only payments made directly to the hospitals/insurance companies were taxed. This year, the largesse comes into the form of a 50 per cent abatement making the effective tax rate 5%.

This history is suffice for the healthcare industry to claim that the intent of the law appears to be not to tax all medical services and the focus is inclined towards providing exemptions. The new Cenvat Credit Rules with their stifling provisions and the very nature of expenses of a clinical establishment would render an exercise on choosing between the abatement and availing of input tax credit a futile one.

The oft-used remedy of debiting charges of some associates and consultant fees and claiming credit on that may not be effective here since the consultant would have to pay service tax if his billings exceed the threshold and he cannot charge service tax if his billings are below.

Yes or no answer

Instead of knee-jerk reactions to protests, the Government should take a decision based on its intention (though this is almost impossible to decipher). Most State Governments levy VAT on medicines and medicinal preparations hinting that it is not a protected sector. Service tax has been lenient only on the agricultural sector and allied agricultural activities. Canadian GST has a specific exemption for most health, medical and dental services performed by licensed physicians or dentists for medical reasons. Such clarity is needed for the present levy. If the Government plans to include healthcare in the proposed negative list for services, it should not levy the tax in the current year. It is critical that a negative list for services is prepared even if GST remains a pipedream.

Knowing the ingenuity of the framers of service tax law, we could end up with a provision that states “healthcare services provided from an air-conditioned clinical establishment with more than 25 beds would form a taxable service except in instances where the patient is from economically weaker section of society (economically weaker section not defined) or the cost of treatment does not exceed Rs 2,00,000/- for a continuous stay of more than 7 days in the clinical establishment”.

It would be preferable not to have such long-winded provisions as this mechanism could be misused to the extent that we could have wealthy individuals suddenly claiming economic weakness, multiple patients undergoing the same treatment and multiple clinical establishments treating the same patient. The dilemma whether to tax or not should be answered either clearly as yes or no instead of saying no but yes if some conditions are satisfied.

(The author is a Bangalore-based chartered accountant.)

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