• Indirect effects of VAT and VAT on medical devices an issue
• Decline in admissions to private hospitals due to high costs
• 30% increase in admissions to State hospitals anticipated 

The already-strained health sector is bracing for a severe blow with the impending 18% Value-Added Tax (VAT) hike set to take effect on 1 January 2024.

Health sector experts warn that, despite the exemption granted to the health sector, particularly pharmaceuticals, the indirect effects, coupled with the direct application of VAT on medical devices, are poised to have detrimental effects on the struggling State hospitals.

The potential impact raises concerns about the capacity of the already-burdened healthcare system to cope with the added financial strain, heightening worries about the well-being of patients and the overall functionality of public health institutions.

As predicted by experts, State hospitals are projected to witness a nearly 50% surge in new admissions, particularly in light of the anticipated rise in charges at private hospitals compared to the previous year. As learnt by The Sunday Morning, private hospitals have encountered a notable 30% decrease in the total number of patients.

In such a backdrop, health experts in the State sector are warning of existing shortages and an anticipated increase in demand next year due to the expected surge in demand for State sector hospitals. The precise impact of the VAT increase is yet to be analysed by the experts as they are still studying the documents (VAT exempted/liable lists) issued by the Government.

Speaking to The Sunday Morning, Government Medical Officers’ Association (GMOA) Spokesman Dr. Chamil Wijesinghe noted that VAT up to 18% would be added and that 3% VAT would be imposed on almost the entirety of human resources.

“We are doubly burdened. VAT is an addition to the PAYE tax. This will lead to a further increase in the number of doctors who are migrating. The Government doesn’t know its priorities; it is yet to take any positive measures regarding the issues we highlighted. This will definitely further worsen the country’s health sector,” he stressed.

The Cabinet has given its approval for an increase in VAT from the current 15% to 18%, effective 1 January 2024.

This adjustment coincides with a reduction in the VAT threshold to Rs. 60 million and the elimination of VAT exemptions for 97 out of 138 goods, anticipating a 2.5% rise in inflation. With this expected increase in inflation, it is projected to exceed the Central Bank of Sri Lanka’s (CBSL) 5% target, as November’s inflation rate was reported at 3.4%.

The Budget for 2024 outlined the plan to raise the VAT rate to 18% in January 2024, while retaining exemptions only for products related to health, education, and select essential foods. This aligns Sri Lanka with regional counterparts such as India and Pakistan, which also have a standard VAT rate.

Despite a notable 51% increase in State tax revenue during the first nine months of 2023 compared to the same period in the previous year, the Cabinet acknowledged a shortfall in meeting tax collection targets agreed upon with the International Monetary Fund (IMF). The new tax measures, set to be implemented in 2024, will extend taxation to goods and services not currently under the purview of VAT.

VAT exempted items

Commencing on 31 December, the VAT landscape in Sri Lanka is poised for a transformation, as highlighted in the First Schedule to the Value Added Tax Act No.14 of 2002, last amended by the Value Added Tax (Amendment) Act No.32 of 2023.

The termination of Part II of the First Schedule, as per the aforementioned amendment, paves the way for a recalibration of VAT exemptions. Effective 1 January 2024, goods and services falling under the ambit of Part III of the First Schedule will be exempt from VAT.

Notably, this includes pharmaceutical products and medicines (excluding cosmetics) prescribed by physicians for therapeutic or prophylactic purposes, along with the raw materials used in their production. 

Furthermore, Ayurvedic preparations adhering to the Ayurveda pharmacopoeia, Ayurvedic preparations (excluding cosmetics), and unani, siddha, or homoeopathic preparations (excluding cosmetics) identified under specific coding systems, alongside their raw materials, are enlisted in the VAT exemption.

Additionally, aids for persons with disabilities such as artificial limbs, crutches, wheelchairs, hearing aids, and accessories, as well as articles approved for use by disabled persons, are granted exemption from VAT upon application and ministerial consideration based on the degree of relief sought by such individuals.

New VAT-liable items

Effective from 1 January 2024, newly-added items subject to VAT include medical equipment, machinery, apparatus, accessories, and their parts; hospital furniture; drugs and chemicals donated to Government hospitals or the Ministry of Health for addressing pandemics or public health emergencies, with approval from the Minister of Finance based on the recommendation of the secretary to the Health Ministry.

This also includes health protective equipment and similar products exported by registered exporters with the Board of Investment of Sri Lanka to the Ministry of Health and Indigenous Medical Services, Department of Health Services, Sri Lanka Army, Sri Lanka Navy, Sri Lanka Air Force, and Sri Lanka Police; medical equipment, medical machinery, or ambulances; packaging materials exclusively for packing pharmaceuticals or ayurvedic medicines manufactured in Sri Lanka, imported by the respective manufacturers if not locally produced, as approved by the Health Ministry secretary or the Department of Ayurveda commissioner; and pharmaceutical machinery and spare parts not manufactured in Sri Lanka, classified under specific Harmonised Commodity Description and Coding System Numbers for Customs purposes imported by pharmaceutical manufacturers and recommended by the secretary to the Health Ministry.

Private hospitals affected

Speaking to The Sunday Morning, former President of the Association of Private Hospitals and Nursing Homes (APHNH) Dr. Ananda Kuruppuarachchi stated that private hospitals had experienced around a 30% reduction in their total number of patients this year.

It is expected that another approximately 10% reduction would occur after 1 January as charges would be increased in parallel with the VAT hike, he said.

“Room rates will be mostly increased, as will charges for medical tests,” he stressed, adding that the indirect impact of the VAT would also affect the health sector. “When the prices of fuel and electricity go up, then the prices of medicine too will have to be increased,” he noted.

Far-reaching impact

Speaking to The Sunday Morning, Association of Health Professionals (AHP) President Ravi Kumudesh said that the impact of the VAT increase on the health sector would be massive and that it may paralyse the already-paralysed health sector.

“The Government says the VAT won’t be added to pharmaceuticals, but the reality is that it affects the funds released to the health sector. The funds previously issued to the health sector will be cut down by nearly 50% due to the VAT increase. In addition, fuel and electricity costs and all other expenses, for which VAT will be added, will be further increased,” he stressed.

According to Kumudesh, prices of all medical tests will be increased and the Government will deduct VAT from donations as well. “We purchase medical devices mostly from the funds we receive from international donations, but now we will have to give a portion as VAT. At present, the health sector is suffering due to the lack of equipment, reagents, and medicines. It will get worse from next month onwards,” he said.

Similarly, Sri Lanka Chamber of the Pharmaceutical Industry (SLCPI) President Prathaban Mylvaganam told The Sunday Morning that there would be indirect VAT impacts on pharmaceutical items despite their inclusion in the VAT-exempted list. The chamber is urging the authorities to expedite the introduction of a new formula to the industry.

“The formula is still under discussion with the National Medicines Regulatory Authority (NMRA). The introduction of the new formula must be expedited,” he stressed. 

Meanwhile, The Sunday Morning reliably learnt that institutions are still studying the VAT impacts on their respective fields and decisions are still being made, especially regarding the percentages of pending price hikes.