GST 2.0: Reshaping India’s Healthcare Landscape Through Tax Rationalisation - IndiaMedToday

The GST Council’s latest reforms mark a structural shift in India’s healthcare ecosystem, easing patient costs, supporting industry competitiveness and expanding insurance penetration - but successful implementation will determine their true impact.

When the Goods and Services Tax (GST) was introduced in 2017, healthcare was cautiously positioned within the framework, with exemptions for hospital services but multiple layers of taxation on medicines, devices and insurance. Eight years later, the 56th meeting of the GST Council has delivered what industry leaders are calling GST 2.0 - the most comprehensive recalibration of indirect taxes since the system’s launch.

The reforms, announced in mid-2025, are particularly significant for healthcare, a sector that continues to struggle with low insurance penetration, high out-of-pocket spending and uneven access to essential drugs and diagnostics. With GST on life and health insurance now reduced to nil, concessional 5 per cent rates extended to all medicines and medical devices and complete exemptions granted to 36 critical life-saving drugs, policymakers have placed affordability and access at the heart of tax reform.

The changes are not limited to patient costs. By rationalising GST on job-work services and inputs for pharma manufacturing, lowering rates on diagnostic reagents and reducing taxes on construction materials, the reforms ripple across the healthcare value chain - from patients and insurers to pharma, MedTech and hospital infrastructure developers. The question now is whether GST 2.0 can translate into measurable gains for patients and investors alike, or whether implementation hurdles will blunt its impact.

Affordability and Patient Access

One of the most direct beneficiaries of GST rationalisation is the Indian patient. Pharmaceuticals account for nearly 30–35 per cent of an average hospital bill, while devices and consumables add further to costs in high-dependency cases such as cancer, cardiac disease, or dialysis. The reduction of GST to 5 per cent across medicines, devices and reagents is expected to ease household expenses and reduce catastrophic out-of-pocket spending.

Dr Rajiv I Modi, CMD, Cadila Pharmaceuticals, noted that the measures will provide “much-needed relief to patients,” particularly as cancer and rare disease therapies move to a nil-GST bracket. “All drugs and medicines have now been prescribed a concessional GST rate of 5 per cent. GST on various life-saving drugs and three critical drugs used for the treatment of cancer, rare diseases and severe chronic conditions have been reduced from 5–12 per cent to zero,” he said, adding that the move “will ease the financial burden on patients, improve access to life-saving treatment and strengthen healthcare.”

Similarly, Dr Shuchin Bajaj, Founder-Director, Ujala Cygnus Healthcare Services, emphasised the impact on middle- and low-income households. “These rate reductions will immediately lower the cost of angioplasty stents, cancer drugs, dialysis consumables and essential diagnostics in our 25+ hospitals, making quality care more affordable to millions of families.”

The impact is not only financial but behavioural. By lowering the cost of diagnostics, especially preventive tests, policymakers hope to nudge patients toward earlier engagement with the healthcare system. Preventive care, often neglected due to affordability concerns, may see greater adoption under the revised tax regime.

Insurance Penetration and Financial Protection

The exemption of life and health insurance premiums from GST is arguably the most transformative element of GST 2.0. With only 41 per cent of Indian households currently covered under government or private health insurance schemes, financial protection remains a weak link in the country’s healthcare framework.

Vishal Bali, Executive Chairman, Asia Healthcare Holdings, described the reform as a “significant enabler,” noting that GST removal “should give a boost to both these segments which are critical for citizens.” The numbers highlight the urgency: life insurance penetration has been on a declining trend and health insurance, though growing, remains far below global averages.

From a provider perspective, Dr Vivek Desai, Founder and MD, HOSMAC, observed that “the exemption of GST on insurance premiums is a positive development… Existing policyholders may also be incentivized to enhance their coverage.” Apollo Hospitals’ MD Suneeta Reddy echoed this view, noting that insurance exemptions, alongside tax cuts on drugs and consumables, “will enable many more Indians to purchase health insurance and insurers will serve a larger insured pool. This will truly unlock access to high-quality healthcare for India.”

For insurers, the GST exemption also removes a long-standing distortion in pricing. Policybazaar, one of the largest insurance aggregators, has reported growing customer interest since the announcement, with a notable uptick in inquiries for comprehensive family coverage. Analysts predict that with premiums reduced by 18 per cent overnight, penetration could accelerate by 20–25 per cent annually over the next three years if supported by awareness campaigns and streamlined claims processing.

Pharma Competitiveness and Supply Chain Resilience

India’s pharmaceutical industry, which contributes over $25 billion in annual exports, has been grappling with cost pressures from raw material imports and global price erosion. GST 2.0 aims to strengthen competitiveness by lowering GST on APIs, diagnostic kits and reagents to 5 per cent, while also reducing tax on job work and manufacturing services.

For manufacturers, this is both a cost and a supply chain play. “The GST revisions go beyond tax rationalisation; they represent a structural shift in how India is enabling healthcare access,” said Sheetal Arora, Promoter & CEO, Mankind Pharma. “By removing GST on life-saving rare-disease and oncology therapies and reducing it on essential medicines and diagnostics, the government has signaled that affordability and innovation can go hand in hand.”

Priyanka Chigurupati, Executive Director, Granules India, underlined the impact on contract manufacturing. “The reduction in job-work GST is significant for contract developers to scale faster, which in turn fuels a stronger and more resilient pharma ecosystem,” she said.

MedTech and Diagnostics: Scaling Preventive Care

For the MedTech and diagnostics sectors, GST 2.0 represents an important shift toward affordability and preventive health. The 5 per cent GST rate on devices and reagents will lower the cost of consumables, from dialysis kits to imaging reagents, making diagnostics more accessible across hospital tiers.

Dr GSK Velu, Chairman, Trivitron Healthcare, Neuberg Diagnostics and Maxivision, described the reforms as “path-breaking,” adding that the reduction from 12 per cent to 5 per cent “should overall boost our economy and benefit every citizen of India.” Dr Bajaj also highlighted that reduced costs on essential diagnostics will expand early diagnosis and strengthen preventive care - a critical need in a country where non-communicable diseases account for two-thirds of deaths.

With diagnostics often being the gateway to treatment, lower costs can drive higher volumes, particularly in Tier-II and Tier-III cities. Preventive screenings for diabetes, cancer and cardiac disease are expected to see uptake, enabling earlier interventions and reducing long-term healthcare costs.

Hospitals and Infrastructure: Capex Relief

Beyond patients and manufacturers, GST reforms extend to healthcare infrastructure. By lowering GST on construction inputs such as cement, fly ash bricks, marble and granite, the government has attempted to ease the capital expenditure burden on hospitals planning expansion.

Dr Desai pointed out that “GST cuts on engineering and construction materials are likely to have an indirect impact, easing the capex required for building and expanding healthcare infrastructure.” This is significant as private hospital chains such as Aster DM and HCG have announced aggressive expansion plans, adding thousands of beds across metros and smaller cities. Lower input costs could improve project feasibility and accelerate timelines.

Suneeta Reddy also linked the reforms to India’s aspiration for stronger health infrastructure. “India’s aspiration for more health infrastructure will be well-served with the reduction in GST for construction inputs,” she said.

Policy and Tax Lens: Structural Rebalancing

Tax experts have framed GST 2.0 not just as rate cuts but as structural recalibration. Prabhat Ranjan, Senior Director at Nexdigm, described it as a “game-changing reform reshaping India’s business landscape.” He emphasised that the reforms “differentiate between what India needs to make affordable and what the government considers discretionary,” with healthcare placed firmly in the essential category.

From a policy perspective, this reinforces India’s ambition to achieve universal health coverage by 2030, aligning fiscal instruments with health priorities. By addressing affordability across the value chain - from patients and insurers to manufacturers and hospitals - GST 2.0 creates a framework for long-term sustainability.

Challenges and Implementation Gaps

Despite optimism, stakeholders acknowledge potential challenges. Dr Desai cautioned that manufacturers of drugs and consumables may face margin pressures, as “input costs continue to attract 18 per cent GST while the final products are sold at a reduced 5 per cent.” Unless input tax credits are extended to hospitals and healthcare establishments, as Dr Bajaj urged, the benefits to patients may be partially offset.

Another concern is uneven transmission of benefits. In the absence of strict enforcement, reduced GST may not always translate into lower retail prices, especially in fragmented supply chains. Monitoring mechanisms will be critical to ensure that patients, rather than intermediaries, capture the gains.

Finally, while insurance premiums are now GST-free, awareness and distribution challenges persist. Without improved outreach, particularly in rural India, penetration gains may fall short of expectations.

Global Parallels and Investor Outlook

Internationally, healthcare taxation varies widely. The European Union exempts most healthcare services and applies zero or reduced VAT on essential medicines. Several Asian countries have also adopted concessional tax regimes for health. India’s GST 2.0, by aligning with global norms, strengthens its position as a competitive destination for pharma manufacturing and medical tourism.

For investors, the reforms enhance visibility and predictability. By lowering patient costs and improving supply chain efficiencies, the sector becomes more attractive to private equity and long-term institutional capital. As Sanjiv Navangul of Bharat Serums observed, the removal of GST on biologics is “a decisive step toward improving and advancing healthcare equity in India,reinforcing the country’s reputation as a hub for affordable innovation.

Outlook for the Next 2–3 Years

The GST Council’s reforms arrive at a critical juncture. With India’s healthcare sector witnessing rising consolidation, PE investments and global integration, affordability and access have become central to policy discourse. GST 2.0 offers relief across the spectrum - lowering patient bills, incentivising insurance adoption, strengthening pharma competitiveness and easing hospital expansion.

Yet, the path forward depends on effective implementation, alignment of input tax credits and transparent price transmission. If these reforms are backed by regulatory vigilance and complementary policies, India could achieve not just incremental cost savings but a structural shift toward universal, affordable and sustainable healthcare.

As Roche India’s Rajji Mehdwan remarked, “For patients, this isn’t just policy; it’s hope.” The true measure of GST 2.0 will be whether that hope translates into real-world outcomes for millions of Indians navigating the complexities of healthcare.