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Is it feasible to tax the provision of health services with VAT?

Foto Francisco Garcia

Francisco Jose Garcia Lara
Surgeon and Master in Health Administration
from the Javeriana University
Columnist of the newspaper La Nación de Neiva

In this blog we will analyze the viability of imposing VAT on health services, for which a review of the rules that establish the current exclusion, of the jurisprudence and a brief technical analysis of the financial implications on the General Security System was carried out. Social in Health (SGSSS).

The Covid-19 pandemic will leave us with several consequences, among which is the increase in the fiscal deficit, making a new tax reform practically essential.


Among the known reform proposals, it is recommended to extend VAT to all products and services that today are not taxed with the aforementioned tax, that is, to add said tax burden to what is excluded as the provision of health services.


In this blog we will analyze the viability of imposing VAT on health services, for which a review of the rules that establish the current exclusion, of the jurisprudence and a brief technical analysis of the financial implications on the General Security System was carried out. Social in Health (SGSSS).


The actual situation

Article 476 of the National Tax Statute (ET) establishes the services that are excluded from VAT. In relation to the health area, it is defined that the following are excluded from the aforementioned tax:


  1. Medical, dental, hospital, clinical and laboratory services for human health.


  1. Services related to social security in accordance with the provisions of Law 100 of 1993.


  1. The mandatory health plans of the Social Security System in Health issued by entities authorized by the National Superintendency of Health.


  1. Commissions for intermediation for the placement of health plans of the General System of Social Security in Health issued by entities legally authorized by the National Superintendency of Health, which are not subject to sales tax -VAT.


In accordance with the provisions of the ET, it is possible to affirm that all health and social security services, in what corresponds to the Health Benefits Plan (PBS), are excluded from VAT.


On the contrary, article 468-3 of the ET establishes that the so-called additional plans, which include prepaid medicine and complementary plans, surgery and hospitalization insurance policies, and health services insurance policies are taxed with VAT at a rate of 5%. It is important to clarify that this tax falls on the value of the plan, not on the health services provided to the members of each of them.


In relation to drugs, devices and supplies that are regularly used for health care, the vast majority are not taxed with VAT, but it should be taken into account that such condition depends on the categorization made by INVIMA to each of them and the corresponding tariff classification, because in the case of these goods there is no rule that establishes in a general way that they are not taxed.


Constitutional jurisprudence

The Constitutional Court has issued jurisprudence on the eventual imposition of VAT or other taxes on health services. Among them, judgment C-094 of 1993, in which, when reviewing the constitutionality of article 476 of the ET regarding the right to equality, it was considered that taxing health services with VAT would imply that people with fewer resources would have to pay additional amounts when requiring this type of services, which would lead to a possible obstacle to access to them.


In ruling C-776 of 2003, the same court declared article 116 of Law 788 of 2002 unenforceable, considering in relation to health services, that taxing them with VAT would imply that some sectors of society had limitations for the satisfaction of their basic needs, generating conditions of inequality and affecting the right to life because it would reduce the possibilities of guaranteeing the vital minimum.


Additionally, in judgment C-1040 of 2003, some sections of article 111 of Law 788 of 2002 were declared unenforceable, because social security resources cannot be subject to any tax; In doing so, the specific destination of these resources would be altered, diverting them for purposes other than the provision of health services, thus violating Article 48 of the Political Constitution.


Financial implications

The SGSSS has a financial structure based on the Capitation Payment Unit (UPC), which in a simple way can be defined as the annual value that the state recognizes to the EPS for each affiliate, in other words, it is the premium that is cancels the EPS for each insured.


The calculation of the UPC is complex, but in general it uses variables such as historical expenditure, frequencies of use, epidemiological risks, incidence and prevalence rates, among others, of the services included in the PBS. In any case and taking into account that to date there is no tax on the UPC, its calculation does not include any value for taxes.


Consequently, any tax or levy imposed on the UPC or the provision of health services immediately affects the balance of said unit, since it would constitute an additional cost value for its calculation that would force the government to increase the value this.


In the same way, taxing any of the goods in the health care chain with VAT (medicines, devices, supplies, etc.) also affects the balance of the UPC and would require the government to increase it to guarantee health care.


The viability of VAT to health services

According to the above, in case of taxing the provision of health services with VAT, there would be the following options: the first, that the tax is assumed by the EPS, either on the value of the UPC or charged to the health services included in the PBS provided by hospitals or clinics; the second, that it is collected from the end user, that is, the patient who received the service is charged; the third, a scheme that combines the two.


In the first option, the VAT would affect the UPC, either by levying it directly with the tax or by applying the tax on the bill of health services received by members, forcing the national government to increase the value of this unit in the same amount of the tax to guarantee its balance, then, the money that would be collected by the VAT would have to be compensated by a greater value of the UPC, that is to say, that financially there would be no benefit, since the greater income also entails a greater expense .


In the second option, transferring the VAT to the end user, that is, to the member requesting the health service, would clearly violate the aforementioned constitutional court jurisprudence by generating limitations for the solution of basic needs, especially of the most vulnerable or low-income populations.


It is enough to imagine a hospital bill for $10 million with a VAT of 5%, which would force a patient to pay a tax of $500,000 pesos, which would inexorably generate limitations on access to the service.


In the mixed scheme, the same drawbacks described for the first two options would be generated.


In the same way, applying VAT to medicines, devices and supplies also leads to the drawbacks of the UPC imbalance and access limitations.


In this vein, regardless of the proposals on the imposition of VAT on all services in order to solve the financial needs of the government, it is not feasible to tax health services with VAT, and if for any reason that tax is approved Regarding the aforementioned services, as claimed in articles 111 and 116 of Law 788 of 2002, it would probably not pass the constitutional court examination and the imposition of the tax would be declared unenforceable.


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