The customer frowns as Service Tax on Cashless Services under Health Policies takes off

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Service Tax on Cashless Hospitalization - Budget 2010Ever since it was first introduced, Cashless Hospitalization remains one of the most attractive services provided by health Insurance companies, to provide advance payment of the hospitalization expenses incurred by policy holders in a “network hospital”. Increasingly, Cashless service has assumed growing importance and almost every insurance company has ensured it provides this benefit to its customers. But, enter Budget 2010 - 11, and the government decides to impose service tax on payments made by insurance companies in settlement of claims for the cashless service. So, you might ask, how does this impact the customer? Well, imposition of service tax on the cashless benefit means higher premiums and soaring hospital bills. Read on, to know how.

In the Finance Bill 2010-11, the proposal of levying 10.3 per cent service tax on hospitals for cashless settlements, tabled by Minister of Finance, Mr. Pranab Mukherjee, received mixed reactions from various sections of the health insurance industry.

The Bill says

‘Tax will be levied on a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic. This will be only applicable to cashless insurance claims’.

The Logic

Before looking at the impact of the decision on policyholders, let us understand just what led to this proposal being flagged off in the first place. It goes like this: Each year the non-life industry, which includes Health Insurance, pays around Rs 6,000 Cr. by way of claims to the healthcare sector (read hospitals, nursing homes, etc). And over half of these payments made are by way of cashless settlement. This in turn makes tax on the ‘Cashless Service’ high revenue generator for the Government of India.

Now that you know what led to the decision, let’s understand how the decision indirectly impacts you, the policyholder, and makes a further dent in your pocket.

The impact:

The Bill clearly says that the hospital will have to pay the service tax. But actually this tax burden will clearly pass on to the patients because if the hospital pays the service tax for treating any patient, it will have to add 10.3 per cent tax separately to the patient's bill. And if the patient has a health insurance policy, it would mean that the insurance company that pays the hospital by way of cashless settlement would have to shell out 10.3 % more, as the hospital bill would shore up by 10.3 %. And the insurance company, in order to be able to bear this service tax burden, would charge a higher premium to the customers to make up for the amount of this tax. Hence, in short, this service tax burden clearly falls onto the policy holders’ lap. Without even being hospitalized, policyholders will have to pay a higher premium. And if they were to be hospitalized, their bills will get inflated by 10 per cent to accommodate the service tax.

This means that henceforth, you will have to pay service tax on all expenses related to health services under health insurance schemes offered by insurance companies settled through the Cashless process. Health check-up provided by hospitals or medical establishments for corporate employees will also come under the umbrella of service tax. But as per Budget 2010, the tax on these health services would be payable only if the payment for health expenses is made through the cashless service, that is, directly by insurance company to the hospital.

All in all, with the government deciding to impose service tax on the cashless service, health insurance costs are definitely set to soar, and at such times what matters most to a customer is quality healthcare, which if present, may offset the cost.

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