FEBRUARY 05, 2020

By Arunjay Singh, Manager & Ashish Pal, Senior Consultant, Mazars India LLP

Excerpts from the Union Budget 2020 Speech -

"INDIA is now making world-class goods and exporting such products. We have made considerable progress in medical equipment, too. Till a few years back, we were dependent on imports for medical equipment. Now, not only we are manufacturing medical equipment but also exporting them in large quantities. This sector deserves further fillip,"

"To achieve the twin objectives of giving impetus to the domestic industry and also to generate resource for health services, I propose to impose a nominal health cess, by way of a duty of customs, on the imports of medical equipment keeping in view that these goods are now being made significantly in India" - Nirmala Sitharaman, Finance Minister

Healthcare sector is one of the most vital and primary sectors in India comprising mainly of hospital sand medical infrastructure including medical devices and equipments. According to a report by IBEF dated November 2019, the Healthcare market is expected to reach USD 372 Billion by 2022 driven by rising incomes, greater health awareness, lifestyle - related diseases and increasing access to health insurance. The healthcare sector has seen a rapid surge in the past few years owing to the backing by large investments from major corporate hospital chains and private equity investors.

Medical Devices and equipments segment in the Healthcare sector is growing at a vigorous pace. According to an investment agency report , the medical devices industry is expected to grow at 28% to reach USD 50 Billion by 2025. India relies on imports to support its healthcare system with medical technology and there is a consistent demand for surgical instruments, cancer diagnostics, orthopaedic and prosthetic equipment, imaging, orthodontic and dental implants, and electro medical equipments. India has become a lucrative destination for countries like U.S., Europe and China for supply of medical devices. India imports nearly 80% - 90% of its medical devices and the import barriers are relatively low as compared to other sectors.

According to a report compiled by the Association of Indian Manufacturers of Medical Devices (AiMeD), statistics show that imports of medical devices in FY19 grew 24% YoY to INR 38,837.28 Crores, which is an increase of INR 7,450 Crores.

According to an investment agency report, there are around 750-800 domestic medical devices manufacturers in India, with an average investment of USD 2.3-2.7 Million and an average turnover of USD 6.2-6.9 Million. Rough estimates indicate that about 65% of the manufacturers are mostly domestic players operating in the consumables segment and catering to local consumption in India with very limited exports.

In order to discourage imports and in line with the Central Government's 'Make - in - India' campaign to promote manufacturing in India, a new cess @ 5% called as 'Health Cess' has been introduced on the import of Medical Devices falling under the Customs Tariff Heading 9018 - 9022 which shall be applicable with effect from February 2, 2020, by virtue of declaration under the Provision Collection of Taxes Act, 1931.

The proceeds from the cess will be used for creating infrastructure for health services in the aspirational districts.

Effective rate alongwith the new levy

Health Cess @ 5% is proposed to be levied under Chapter V of the Finance Bill, 2020 in accordance with Section 14 of the Customs Act, 1962 and the Customs Valuation Rules. A comparative analysis of the existing and proposed import duty implications for HS Code 9018 (Medical Equipments) is illustrated below -

Further, Notification No. 8/2020 - Customs dated February 2, 2020 provides the list of goods which would be exempted from the levy of Health Cess which are exempted from the levy of Basic Customs Duty including the exemptions under the Free Trade Agreement notifications.

It would be pertinent to refer to Sr. No. 3 of the said notification, which provides reference to goods mentioned under Notification No. 50/2017 - Customs dated June 30, 2017 (pertaining to exemption from levy of Basic Customs Duty). An exemption has been granted from levy of Health Cess to 'raw materials, parts or accessories for use in manufacture of goods falling under headings 9018, 9019, 9020, 9021 or 9022'. Hence, any parts or inputs used in the manufacture of medical goods would not be subjected to the levy of Health Cess.

Reactions to the New Levy

As per media reports, a medical devices manufacturers association termed the levy as retrograde since the increase in import duty will lead to an increase in the cost of imported medical devices, which would ultimately have to be borne by the patients, thereby decreasing the affordability of such devices. On the flip side, another trade association of manufacturers reportedly demanded that the Central Government should seek 15% duty on imports of medical devices and that a meagre levy of 5% is not in line with the expectations of the domestic industry.

Closing Remarks

The Finance Minister mentioned during her Budget Speech, that India's dependency on imported medical equipments has reduced in recent time sand India has already forayed into manufacture and export of medical devices. Amedia report suggests in order to provide further fillip to the sector, a detailed scheme to promote manufacturing of medical devices is expected to be announced soon. However, with the overt reliance of the Indian healthcare industry upon global technology and equipments, a new levy in the form of Health Cess may increase the cost of healthcare facilities in India which would resultingly decrease the affordability of such facilities. Further, the domestic market may also view the new levy as a boost to the manufacturing activities and to make the medical devices cost effective. The healthcare sector being of primary importance, it would be imperative to watch the developments unfold in the medical devices and equipment industry.

(The views expressed are strictly personal.)