This comes even as the draft National Health Bill 2009 has been open for public debate for the last several months.

The long-neglected health sector appears to be finally getting some much needed attention from governments.

It is in this context that one is surprised to see the proposal in the finance minister’s budget speech, which seeks to impose service tax on the services rendered by the hospitals where the payment is made to them by the insurance companies and/or the TPAs directly. This happens on what is popularly called “cashless” facility under the health insurance facility.

I have already written about how 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.

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, this levy is unlikely to yield a single rupee in extra revenue to the government. Say an insurance company approves the cashless facility for a particular patient to the hospital for treatment costing Rs 2 lakh. Now, the hospital will have to charge a service tax of 10.3% 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.

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

This means the government will now be collecting the service tax amount from the hospitals rather than from the insurance companies, leading to zero increase in overall service tax revenues.

The hospitals will not be affected as they will collect it from the insurance companies. Nor will the insurance companies be affected as this will not result in any additional cash outflow for them due to adjustment against their service tax liability. But consumers will be affected as this will use up their claim amount limit, thereby reducing the amount of health coverage.

Of course, the hospitals and insurance companies will not rest easy till the rules (most experts we spoke to were not sure about them) are clear that this levy will follow the basic principle of allowing input credit, which is a cornerstone of the modvat and service tax regime (as well as the goods and services tax that is slated to take over next year).

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.

The Draft National Health Bill 2009 states that health is a fundamental human right indispensable for, and intricately linked with, the exercise of all other human rights. It is also a fact that India is among the bottom 5 countries in the world (that’s right, the bottom 5) in terms of public health expenditure as a percentage of the total health expenditure.

So, given that the government is unable to provide this basic human right to its own citizens and he is forced to turn to private insurance providers and what’s more is already paying service tax on such premiums, the imposition of this tax in this manner only amounts to rubbing salt to injury.

There is no arguing the government’s need to raise more resources. But as we have seen, no additional revenue will result if tax is imposed in this manner. 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 damage to the consumers.