Explore the case law on ‘Composite Supply’ under Health Care Services. This analysis delves into the complexities of a composite supply involving exempt and taxable components, examining the eligibility for Input Tax Credit and the implications for the health care provider.
An advance Ruling was sought by M/S Columbia Asia Hospitals Private Limited before The Authority of Advance Rulings, Bengaluru in the year 2018 in the matter ‘if a composite supply includes an Exempt supply as well as a Taxable supply, then, is it treated as a Composite Supply and if the Exempt Supply is the Principal Supply, then the resultant Composite Supply is an Exempt Supply or not? If, the said supply is not treated as a composite supply, is a registered person eligible to claim ITC on inputs including input services as well as capital goods related to both taxable and exempt supplies?’
A gist of background of the working of the hospital is as follows-
- It provides secondary and tertiary Healthcare services which in turn categorises as In-patient (IP) and Out-patient (OP) services.
- All IP services are supplied like providing medicines and food as prescribed by the respective doctor(s) which are enumerated in the invoice raised at the time of discharge.
- All OP services are supplied to the Patients in the form of medical consultation, administration of medicine, dressing etc. Also, certain services are supplied to persons like attendants of the patients, visitors etc. in the form of Canteen or Restaurant or alike.
- In the pre-GST era, Health care services were specifically exempted from the levy of service tax vide Mega Exemption Notification number 25/2012- Service Tax dated 20.06.2012. But, Value Added Tax (VAT) was paid on medicines provided to IP and OP.
The applicant company contended that in the pre-GST era, it was required to reverse CENVAT Credit availed on input material and input services in the manufacture of exempted services under Rule 6 of CENVAT Credit Rules, 2004. However, the company further contended that it was not under an obligation to reverse the CENVAT Credit on Capital goods availed on capital goods.
Section 16(1) is of CGST Act, 2017 is enumerated below-
Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Hence, it is clearly seen that as per section 16 of CGST Act, 2017 there is no distinction been made between inputs, input services and capital goods.
As per section 17 (2) of the CGST Act, 2017-
Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
It is therefore stated that availment of ITC is not possible on exempted supplies.
Further the applicant company requested the Authority to opine on the following events-
- If health care services are provided which are prima facie exempted from levy of GST along with other Taxable services to IP and OP, could be treated as Composite Supply?
i. If yes, the whether supply of pharmacy goods, consumables and canteen services form part of such composite supplies to be exempt from tax?
ii. Valuation of IP Pharmacy, if the same to be treated as a part of composite supply?
- If the supply cannot be construed as a Composite Supply, whether the company can avail ITC on inputs and input services required to supply medicines, consumables and food supplied in conjunction with the Health Care services and eventually discharging the GST Liability?
- Whether the ITC availed on inputs, input services and capital goods attributable to supply of health care services needs to be reversed?
- If such inputs are used for both taxable and exempt supply then the treatment of ITC to be availed for taxable supplies?
As per circular No. 32/06/2018-GST dated 12th February, 2018, services provided by senior doctors/ consultants/technicians whether employed by hospital or not are fully exempt. The fees charged by hospitals to the patients including any retention money are fully exempt. But food supplied to OP is taxable. This circular was also presented by the applicant company for reference to Honorable Authority.
Examination of relevant sections pertaining to the case-
- Supply under GST: –
Section 7(1) of CGST Act states that the word ‘Supply” includes-
- All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
- Importation of services for a consideration whether or not in course or furtherance of business;
- The activities specified in Schedule I made with or without consideration;
- Activities treated as supply of goods or services as referred to in Schedule II.
The applicant company is providing health care services and other ancillary services for a consideration and in course of furtherance of business, hence this amounts to ‘Supply’ as per CGST Act, 2017.
- Composite Supply under GST: –
Composite supply has been defined under section 2(30) of the CGST Act to mean a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is the principal supply.
- Taxable supply under GST: –
Taxable supply means a supply of goods or services which are leviable to tax under GST as enumerated under section 2(108) of the CGST Act.
- Exempt supply under GST: –
As per section 2 (47) of CGST Act, 2017 “Exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.
As examined above, “Exempt Supply means supply of any goods or services or both which attracts nil rate of tax………” Hence, Exempt Supply also fall under the category of taxable supplies.
But if some supplies relating to food and/or medicines are supplied not as prescribed by the doctor or nutritionists, then they donot fall under the definition of ‘composite supply’ and hence will be treated as a separate supply and will be liable to tax.
In case of OP, where they are prescribed medicines and food by a doctor or a nutritionist and if they are free to purchase the same from any pharmacists (need not be from the same hospital) of his/her choice, the supply does not constitute a ‘Composite Supply’ and hence will not form part of health care services. But, when the OP do not have a choice, but to purchase the prescribed medicines and food from the pharmacy maintained and carried on by the hospital, then they form part of the “health care services” and will constitute a composite supply as mentioned above, consequences of which will be regarded as an Exempt Supply.
The applicant also raised a question on “valuation of IP Pharmacy, if the same to be treated as a part of composite supply” which can be explained as under-
If the food and/or medicines supplied form part of a single price including the health care services, then there is no need for separate valuation.
If they cannot be treated as a composite supply then they will constitute a mixed supply which is defined as under-
As per section 2(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price, where such supply does not constitute a composite supply.
For example-
You buy a syringe for say Rs.50 which comes with a needle. Then, the GST rate applicable on syringe is considered. Currently it is 12%.
Also, the applicant sought decision of AAR in treatment of ITC in case of exempt and taxable supplies. As per section 16 (1) of CGST Act, 2017, a registered person can take ITC of inputs used by him in course or furtherance of business. Here, prima facie, the applicant can avail ITC on inputs as he is using it in the course or furtherance of business. But, after studying section 16 (2) of CGST Act, 2017, the ITC is restricted only upto inputs attributable to Taxable supplies including zero rated supplies. As a result, health care services are specifically exempted from levy of tax. Hence, no ITC will be available on the inputs used to supply health care services.
Ruling
Where two or more supplies of goods and/or services which are naturally bundled in which principal supply is an exempt supply and others being taxable supply/supplies, can be treated as an exempt composite supply as enumerated in Section 2 (78) of CGST Act, 2017.
The applicant is eligible to claim ITC on inputs, input services and Capital Goods which are used to supply taxable supplies and not exempt supplies enumerated under relevant provisions of CGST Act, 2017.
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