GST on Hospitals – Curtailing The Exemption

1. Hitherto health care services provided by clinical establishments have been exempted from GST. The GST Council at their 47^th meeting however decided to bring an element of the health care services to tax by seeking to tax the room rent (excluding ICU) exceeding Rs 5,000/day/patient charged by a hospital @ 5% without ITC.

2. Now Notification No. 03/2022-CT (Rate) read with Notification No. 04/2022-CT (Rate) both dt. 13.07.2022 have been issued to provide for levy of GST w.e.f. 18.07.2022 on the following supplies:

3. The aforesaid change, therefore, implies that w.e.f. 18.07.2022 the services provided by a clinical establishment by way of providing room [other than Intensive Care Unit (ICU)/Critical Care Unit (CCU)/Intensive Cardiac Care Unit (ICCU)/Neo natal Intensive Care Unit (NICU)] having room charges exceeding Rs. 5,000/day to a person receiving health care services shall be liable to tax @ 5% (without ITC).

4. Further the expression ‘clinical establishment’ and ‘health care services’ have been inserted under paragraph 4 of the NN 11/2017-CT (Rate) as under:

(xxxviii) ‘clinical establishment’ means, –

a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases;

 (xxxix) ‘health care services’ means, –

any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma;

5. It may be noted that the expression Intensive Care Unit (ICU)/Critical Care Unit (CCU)/Intensive Cardiac Care Unit (ICCU)/Neo natal Intensive Care Unit (NICU) has not been defined in the given notification. Dictionary definitions are as under:

• Intensive Care Unit – A special department of a hospital or health care facility that provides intensive care medicine. Intensive care units cater to patients with severe or life-threatening illnesses and injuries, which require constant care, close supervision from life support equipment and medication in order to ensure normal bodily functions.
• Critical Care Unit – Similar to Intensive Care Unit
• Intensive Cardiac Care Unit – A hospital ward specialized in the care of patients with heart attacks, unstable angina, cardiac dysrhythmia and (in practice) various other cardiac conditions that require continuous monitoring and treatment.
• Neo natal Intensive Care Unit – An intensive care unit (ICU) specializing in the care of ill or premature newborn infants. Neonatal refers to the first 28 days of life.

6. Therefore the GST shall not be levied on room charges (even if it exceeds Rs. 5,000/day) if the same is in respect of the aforementioned ICU, CCU, ICCU or NICU.

7. Now the following aspects are required to be noted in respect of the aforesaid levy:

a. The description of the taxable service indicates that it applies to the situation where the room charges exceed Rs. 5,000/day. Will it thus imply that GST @ 5% shall be payable only on the amount that exceeds Rs. 5,000/day? It must be noted that the following proviso has been added to the exemption provided at Sr. No. 74 of the NN 12/2017 – CT (Rate) in respect of the health care services:

“Provided that nothing in this entry shall apply to the services provided by a clinical establishment by way of providing room [other than Intensive Care Unit (ICU)/Critical Care Unit (CCU)/Intensive Cardiac Care Unit (ICCU)/Neo natal Intensive Care Unit (NICU)] having room charges exceeding Rs. 5000 per day to a person receiving health care services.”

The reading of the aforesaid proviso indicates that the general exemption of health care services shall not apply to the services by way of providing room having room charges exceeding Rs. 5,000/day. Hence once it is established that the room charges in question exceed Rs. 5,000/day, then the said general exemption shall not apply and hence the entire room charges (and not just the amount exceeding the said limit of Rs 5,000/-) shall be liable to tax. It may also be noted that the drafting of the aforesaid proviso is distinct from similar exemptions (e.g. maintenance contribution by members of housing society) wherein the exemptions have been granted ‘up to’ the specified amounts. Hence in our view, once the room charges exceed Rs. 5,000/day, GST shall be payable on the entire value of the room charges.

b. There can be issues in valuation. It may be noted that the levy of GST u/s 9(1) of the CGST Act, 2017 is on the value determined u/s 15 of the CGST Act, 2017. Hence it is incumbent on the clinical establishments to consider the said provisions and arrive at the defendable value of the taxable supply in question.

c. The expressions ICU read with the expressions CCU, ICCU or NICU are required to be broadly construed to include every form of the unit within the hospital that requires intensive care of the patients admitted to such units in terms of continuous monitoring and treatment. Hence even the units described by other terms such as Cardiac Intensive Care Unit (CICU), etc. should be excluded from the aforementioned levy.

d. At times the insurance companies may bear the expense for the treatment that includes the room charges. Hence an issue may arise as to whether the insurance companies will be eligible for the ITC of the tax charged by the hospitals. The answer appears to be no since the recipient of the supply shall be the patient and hence the insurance companies may not be able to avail of the ITC.

e. The aforementioned notification can be considered to have been issued contrary to the provisions of the Act. This is so because the provisions contained u/s 8(a) of the CGST Act, 2017 provide for the determination of tax liability (that even includes determination of exemption) in case of a composite supply based on the principal supply. Certainly, the test of composite supply as provided u/s 2(30) of the said Act can be said to be fulfilled when a patient avails various supplies (that includes treatment, medicine, stay, food, etc.) that are naturally bundled and supplied in conjunction with each other wherein undisputedly the principal supply is ‘health care services’ in terms of treatment of the illness in question. It must be noted that the definition of ‘health care services’ do not exclude such elements in terms of stay, food, etc. as part of the treatment. It is a settled law that the notification cannot be issued contrary to the provisions of the Act. Therefore in times to come we shall have to see the decisions of the Courts on this issue. Till such time the hospitals may not collect the tax separately and rather deposit the same under protest to reserve the right to seek the refund.

8. The above analysis indicates that tinkering with only one of the elements of a composite supply that is exempt leads to several issues (legal as well as factual). Hence GST Council should ideally consider wider ramifications before bringing such elements to tax. Needless to say, the patients will have to bear the additional 5% or the insurance companies, as the case may be. Hospitals on the other hand will have to undertake due compliances.