The government should promptly reduce customs duties and rollback health cess in Union Budget 2021-22 to help the medical device sector overcome the severe financial crisis created by COVID-19 pandemic, urged Medical Technology Association of India (MTaI), which represents leading research-based medical technology companies with a large footprint in manufacturing and training in India.
According to a whitepaper, jointly released by Price water house Coopers (PwC) and MTaI last month, measures to control the spread of COVID-19 pandemic led to a sharp fall in revenues of hospitals, diagnostic centres, medical device firms and other constituents of the healthcare ecosystem. The shortfall in revenues forced these firms to postpone or cancel their capital expenditure plans.
“Projects to increase healthcare access have been hampered by the pandemic and could potentially see delays in the near future,” the whitepaper entitled ‘The MedTech Industry in India – COVID-19 and Beyond’ stated.
Even before COVID-19, the industry was reeling under 7-8 per cent depreciation of INR against EUR and USD and policy decisions like the imposition of additional five per cent health cess ad valorem on imported medical devices and not reducing the customs duties in Union Budget 2020-21. Considering that more than 70 per cent of the demand for medical devices in India is met through imports, these factors kept healthcare costs for patients high.
“The MedTech industry strived to protect jobs even in this inclement weather. The global boards of MedTech firms displayed forbearance but if high customs duties and additional health cess continue they would grieve this erosion of their shrinking corpus,” said Pavan Choudary, MTaI Chairman and Director-General.
“Health cess ad valorem and the current high customs duty regime on medical devices are also contrary to the vision of the government to provide affordable healthcare to patients. The industry seeks immediate government assistance by removal of health cess and reduction in customs duties in the upcoming budget,” said Sanjay Bhutani, Director, MTaI.
Major concerns of the medical device industry that need to be addressed are:
High customs duties and additional health cess: The high customs duties have adversely impacted the costs of products in India which contradicts the government’s efforts to provide low-cost healthcare to the masses through ambitious schemes such as AB-PMJAY. The association seek a reduction of customs duties (at the minimum, bring down to 2.5 per cent) and rollback of the additional five per cent health cess ad valorem imposed on imported medical devices at the earliest to affect the margins lost due to currency depreciation, COVID induced lockdown and the economic slowdown experienced thereafter. It is worth noting that some segments of the industry experienced revenue downfall up to 85 per cent due to postponement of elective procedures.
Additionally, since the custom duty regime on most medical devices in neighbouring countries of Nepal, Bangladesh, Sri-Lanka, and Bhutan is lower than in India, the duty differential could lead to smuggling of low-bulk-high-value devices. The result will not only be loss of revenue for the government but also the patient will be beset with products which are not backed by adequate legal and service guarantees.
A comparison of customs duties in India in comparison to those in neighbouring countries of Sri Lanka, Bhutan, Bangladesh and Nepal is given below:
The customs duties on IVDs, which increased from 10 per cent to 30 per cent last year, that are imported from the USA are also impacting the accessibility and affordability of diagnostics services in India. India imports 60% of its diagnostics, most of which include tech-intensive testing methodologies such as molecular testing etc. which serve the priority diseases like HIV, Hepatitis, Cancer markers, among others and are not domestically produced. Increasing customs duty of such preventive tests for critical diseases like cancer and HIV will severely affect the accessibility to affordable healthcare.
GST on medical devices & spare parts: GST should not be charged on free goods and samples of healthcare products as it is needed to promote the expansion of the healthcare sector through reduced costs improving patient accessibility. GST on medical devices is taxed at 12 per cent; it should be brought at par with preferential products and taxed at a lower rate of five per cent. Spare parts to be used for medical equipment should be charged at the same rate of customs duty and GST.
Tax holiday for R&D: Tax holiday should be provided to medical device R&D centres under the Income Tax Act to boost investment in setting up in-house R&D capabilities. We also seek tax incentives for the industry for developing global patents from India and tax deduction on income made by individuals or a company for rewards earned on patent development or patent licensing.
GST on healthcare services: Healthcare services are currently exempt from GST. As a result, hospitals are not able to claim GST input. This results in higher cost of treatment for the patient. Once zero-rated, Hospitals will be able to avail GST credit on inputs, leading to lower healthcare services cost.
Expenditure on CSR: Expenditure on CSR is being disallowed in tax computation. CSR expenditure has been mandated under the law and therefore should be claimable as a tax-deductible expenditure. Non-deductibility is pushing corporates to structure their CSR spends to maximise tax benefits which are leading to tax litigation cases as well and causing undue suffering to genuine corporates that wish to comply with this social obligation.
Tax Incentives on Exports: Currently, there are no tax benefits on export income. Export being a growth engine for the economy it is important that efforts should be made to make it competitive in the international market. India’s export performance in the last 2-3 years has been on a decline which impacts the balance.