The healthcare sector has been hardly subjected to indirect taxes on their services, considering its importance and the object of reducing the cost of healthcare services. The imposition of taxes on healthcare services could have a direct impact on the public at large in the form of the increased cost of treatment. However, the relaxation/exemption has not been provided to such cosmetic treatments considering they are primarily for the enhancement of beauty (considered as a luxury) and not strictly a necessity.
GST is levied on the supply of goods or services or both. So long as there is a single supply of either goods or services, there may not be many challenges in the determination of classification and the applicable rate of such supply. However, many business circumstances may require making a supply of goods or services in combination. Such a combination may be:
(i) Combination of goods having the same or different rate of tax
(ii) Combination of services having the same or different rate of tax
(iii) Combination of goods along with services with same or different rate
It becomes imperative in such cases to determine the essential character of the supply. In such cases, the tax liability would be based on whether the said transaction is a composite supply or a mixed supply.
Exemption to healthcare service, as available in the erstwhile service tax regime, continues even under the GST regime. Under Sl.no. 74 of Notification No. 12/2017- CT (Rate) dated 28.06.2017, a complete exemption has been granted to services by way of:
(a) healthcare services by a clinical establishment, an authorised medical practitioner or para-medics;
(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above
In the 47th GST Council Meeting, it has been recommended to rationalise the existing rate structure, wherein it has proposed to withdraw certain exemptions. Sl.no.5 of heading C.4 of the press release, provides as under Room rent (excluding ICU) exceeding Rs 5000 per day per patient charged by a hospital shall be taxed to the extent of amount charged for the room at 5% without ITC.
The above proposal under the guise of rate rationalization is nothing short of a shock-treatment for the healthcare sector, as it would unsettle the settled tax position and lead to unwanted tax litigations.
The first striking and notable doubt which comes to the mind is whether hospital room rent is an independent supply of service and whether there exists an independent exemption entry for the same under the GST law.
The Punjab & Haryana High Court in the case of M/s. Fortis Health Care Ltd. and Another had passed a combined order against a batch of writ petitions, holding that Before such a transaction is put to tax, whether under the Haryana or Punjab VAT Act, it would have to satisfy the dominant nature test by reference to the substance of the contract. A contract for medical treatment necessarily involves medicines, supply of surgical items, stents, implants, valves, without which a medical procedure or medical treatment cannot be completed.
Medical procedures/services offered by the petitioners are a service. The supply of drugs, medicines, implants, stents, valves, and other implants are integral to medical services/procedures and cannot be severed to infer a sale as defined under the Punjab or the Haryana act and therefore, are not exigible to value-added tax.”
Similarly, the Jharkhand High Court in the case of M/s. TATA Main Hospital held as under “On the facts noticed in the foregoing paragraphs, we find that the TMH is not doing business of sale of the aforesaid articles, i.e. Medicines, vaccines, surgical items, x-ray films & plates, etc. and therefore, cannot be said that the Hospital is a dealer within the meaning of Dealer under the Bihar Finance Act.
There are numerous other judgments of the Hon’ble High Court which have held the same view. Further, the following advance rulings under GST have held that supply of medicines, consumables, implants, surgical items such as needles, reagents, etc. used in laboratory, room rent used in the course of providing health care services to in-patients for diagnosis or treatments which are naturally bundled and are provided in conjunction with each order would be considered as a composite supply of healthcare services.
(i) CMC Vellore Association [2020-TIOL-16-AAR-GST]
(ii) Terna Public Charitable Trust [2019-TIOL-241-AAR-GST]
(iii) Kinder Women’s Hospital and Fertility Centre Pvt Ltd [2019-TIOL-143-AAR-GST]
(iv) Baby Memorial Hospital Ltd [2019-TIOL-430-AAR-GST]
(v) Kindorama Healthcare Pvt Ltd [2019-TIOL-141-AAR-GST]
(vi) Royal Care Speciality Hospital Ltd [2019-TIOL-423-AAR-GST]
(vii) Starcare Hospital Kozhikode Pvt Ltd [2019-TIOL-146-AAR-GST]
(viii) Ernakulam Medical Centre Pvt Ltd [2018-TIOL-188-AAR-GST]
(ix) KIMS Health Care Management Ltd [2018-TIOL-236-AAR-GST]
Even if the said proposal is given effect by way of a change in the rate notification, one can still argue that room rent is not an independent service and would continue to be part of the healthcare service, exempt under GST. Further, once a transaction is considered to be a composite supply, the various elements of the said transaction cannot be severed for providing different tax treatment.
The second doubt which arises is whether the GST Council have decided to impose GST merely because the room rent charged by some of the hospitals could be high, and thus it has been assumed that such hospitals are supposedly providing some additional services which is other than healthcare services.
With regard to the second possible reasoning for levy of GST on room rent on the ground of high room rent, it is nowhere provided under the GST law that the levy would be dependent on the extent of amount charged. Similar argument was considered by the Department under the erstwhile service tax regime, wherein it was proposed to demand service tax on the ground that the amount charged by the clinical establishment for the stay of patients and other facilities where on the higher side.
In the case of Coconut Lagoon Kumarakom , the CESTAT (Bangalore) against a batch of appeals on the same matter passed a single order in favor of the assessees, and had held as follows:
Going by the mere fact that the centres are located in the resorts and sometimes the duration of treatment is for one or two days, it cannot be concluded that the massages or treatments offered by these centres are only for general well-being and not for any therapeutic value. The Order-in-Original also refers to the ambience and the fees charged in the packages and finds that these cannot be equated to treatment. We fail to understand as to how the cost of treatment and the ambience of the treatment would render such treatments to be non-therapeutic and only for well-being.
It is not always necessary that the treatment should be only in the dull/dreary atmosphere of hospitals alone. If some well to do patients prefer to have treatment in a better circumstance and are willing to pay for the same, such treatments cannot be ‘for that sole reason’, held to be no treatment. Not all the people who stay in the resort may take the treatment.
What is important is whether such treatments are given by a qualified Doctor/Doctors and whether the procedures are prescribed under therapeutic tests.
It is important for the GST Council to evaluate the impact of such an amendment, as it would certainly increase the cost of provision of healthcare service. Further, since the said proposal is against the principle of composite supply, the said proposal could certainly be subject to challenge before the judicial forum.
Also, there could be certain hospitals which are exclusively engagement in providing exempted healthcare services and hence not registered under GST. With such an amendment (without considering the legal challenges), such hospitals would also be required to register under GST, if the rent for any of the rooms (other than ICU) exceeds Rs.5,000/- per day.