Service tax on cashless mediclaim: Will you suffer?

A small headline in a leading paper caught my eye. A 'Right to Health Bill' has just been introduced in the Assam state assembly. In any case we have a Draft National Health Bill 2009 that has been open for public debate for the last several months. Clearly the long neglected health sector is finally seeing some much needed attention from the central and state governments.

It is in this context that one is surprised to see the proposal in Finance Minsiter Pranab Mukherjee's budget which seeks to impose service tax on the services rendered by the hospitals where the payment is made to them by insurance companies and/or the TPAs (third party agents) directly. This happens on what is popularly called as 'cashless' facility under the health insurance facility.

As it is hapless 'mediclaim' (as hospital expense reimbursement policies are popularly known) consumers are already being denied the cashless facility due to the problems between the insurance companies/TPAs on the one side and the hospitals on the other side. If Pranabda's service tax proposal is approved even in the cases where this facility is available it will become far more expensive. This is adding salt to injury since the consumer has already paid service tax on his insurance premium.

And the irony is that, this levy is unlikely to yield a single rupee in extra revenue to the government.

Click NEXT to read an example that shows how the government will not earn an extra rupee.

Consider this example. The insurance company approves the cashless facility for a particular patient to a hospital for treatment costing Rs 2 lakh.

In such a case the hospitals will have to charge a service tax of 10.3 per cent on the total bill amount (that is the bill amount will be Rs 2 lakh plus Rs 20,600 as service tax) and the insurance company will pay Rs 2,20,600 to the hospital.

Now the insurance company is likely to have the right to set off this service tax amount of Rs 20,600 against it's own liability to pay service tax on the insurance premiums that it collects from all its consumers.

This in effect will mean that the government is actually collecting this service tax amount from the hospitals as against collecting it from the insurance companies with zero increase in overall service tax revenues.

Click NEXT to read how the consumers will suffer.

Meanwhile the consumers are likely to suffer, as the amount of service tax paid to the hospitals is likely to use up their claim amount limit -- to that extent -- even though it may not result in a net cash outflow for the insurance company.

To summarise: The end result will be hospitals will not be affected because they will collect it the service tax from the insurance companies, insurance companies will not be affected because this will not result in any additional cash outflow for them due to adjustment against their service tax liability but consumers can be the only ones who are affected as this is likely to reduce the amount of their health coverage.

Of course the hospitals and insurance companies cannot rest easy till the rules (most experts Apnapaisa.com spoke to were not sure about them) are clear about this levy.

Given this situation of no extra revenue accruing to it, it is unclear why the government has chosen to impose this tax in this manner at this stage.

Nobody can argue with the government's need to raise more resources but in this case, no additional revenue can result as discussed above. One only hopes that better sense will prevail and the tax in its current avatar will be dropped.

If that is not possible then a quick clarification on how it will work may also ensure that the fallout from this levy causes the least amount of loss to the consumers.