Sukumar Mukhopadhyay: Should service tax on high-end healthcare been reversed?

When the Budget 2011 was passed in Parliament in March this year, we found that the much-hyped imposition of Service Tax on high-end healthcare service has been withdrawn by the Finance Minister. In the Budget presented on

28th February 2011, the Finance Minister had declared that the scope of health services was being expanded by including:

a) All services, including diagnostic services provided by a centrally air-conditioned (wholly or partially) clinical establishment having more than 25 beds for in-patient treatment during any part of the year;

b) Diagnostic services being provided by a clinical establishment with the aid of laboratory or other medical equipment; and

c) Services provided by a doctor, not being an employee of a clinical establishment, from the premises of such establishment.

The imposition was met with an extremely vociferous campaign by the Indian Medical Association which compared this service tax to the salt tax of the Gandhian era. Some other doctors called this imposition a ‘misery tax’. This sort of name calling of a tax is not uncommon in the history of fiscal restructuring. When Value Added Tax was first  introduced, its appreciation varied from one extreme to the other. Its critics announced that VAT 'arouses as must interest as a new execution technique does to somebody waiting in a death row1'. Another notable comment was that “VAT may be thought of as the Mata Hari of the tax world – many are tempted, many succumb, some tremble on the brink, while others leave only to return, eventually the attraction appears irresistible2”. However, all these name callings against VAT are over and it has become the most acceptable tax in the most part of the world.


The no-tax campaigners have directed their criticism against the use of air-conditioner. They have argued that air-conditioner in hospitals is a necessity and not a luxury. This argument is completely fallacious because the tax was being imposed not on the air -conditioner at all. It was just a part of the definition to distinguish the hospitals on which the tax was intended to be imposed. The idea was to impose a tax on hospitals that are generally frequented by the rich and the upper middle class and sometimes by the “middle middle” class. Other hospitals are generally frequented by the “middle middle” class, lower middle class and the poor. This is only a method of classifying taxable and non-taxable services. Nothing more must be read into this.

Regarding the quantum of the tax, one must remember that it is not only a small amount by itself but at the same time, the hospitals can utilise the service tax paid against the Cenvat Credit which accumulate with them. The hospitals use a lot of taxable goods and services such as machines, materials, telephone service, insurance service and many others. Since they do not pay taxes, they cannot utilise the Cenvat credit which they can utilise now. That might almost balance the quantum of the tax in which case the hospitals will not be losers at all. They can even charge a token amount of 1% from the patients while themselves paying 5% to the Government and the rest of 4% can be adjusted from the Cenvat Credit. That will keep the GST chain moving. It is also to be kept in mind that in the outdoor treatment (which is more than 50% of the total patients), the doctors charge between Rs.500/- to Rs.800/- in which case the tax only comes to Rs.25/- to Rs.40/-.

So far as the people are concerned they should also understand that the tax system has to be improved and made simpler. The people in general use mobile phones and telephones far too much compared to earlier. If they can pay 10% service tax on the use of telephones and mobiles without feeling any pinch, do they have any right to complain against paying 5% on health service in up-market hospitals where they are being rampantly over-billed?

If we look at the international experience we find that in the European Union although the standard exemptions under the Sixth Directive include health care many of the countries do not follow this Directive. Countries such as Japan and New Zealand have seamless GST with no exemptions and economists regard this system as the best.

Conclusion is that for India also we have to develop the mind set for having a GST without exemptions even for private health services. Fortunately the Finance Minister has indicated in the Parliament while getting the Budget passed, that the exemption will continue till the full-fledged GST comes next year. This is a good declaration and we hope that the GST when it comes next year does not have many exemptions and not even on the high-end or up-market health care service.