Taxing Hospital Rooms: More Problems for Minuscule Tax Collection

The 47th GST Council meeting held on 28-29 June, 2022 decided that non-ICU room charges in hospitals shall be taxed @ 5% without input tax credit where room charge is more than Rs. 5000 per day per patient. The recommendation states as follows:

“Room rent (excluding ICU) exceeding Rs. 5000 per day per patient charged by a hospital shall be taxed to be extent of amount charged for the room at 5% without ITC.”

Taxing Hospital Rooms : What’s in

• • Hospital rooms to be taxed if tariff is more than Rs. 5000 per day per patient
  • Non- ICU rooms only to be taxed.
  • ICU rooms spared from GST
  • Tax rate to be 5% on room charges
  • No input tax credit allowed
  • If room shared by more than one patient, room charge threshold of Rs. 5000 to be taken per day per patient.
  • Likely to be effective from 18.07.2022

Recently Revenue Secretary in Ministry of Finance reacted to the voice being raised on taxing @ 5% non-ICU hospital beds having a charge of more than Rs. 5000 per day. According to him, percentage of rooms in hospitals where rooms are charged for more than Rs. 5000 per day are ‘minuscule’ and cannot be said to be affecting affordable health care. One who is able to pay Rs. 5000 can also pay Rs. 5250, i.e. Rs. 250 on account of GST. Levy of GST, that too @ 5% should not be taken as a hit against affordable health care. He has been quoted saying that “this GST, which comes into a common pool, will be used for poor.” –    as if he wants to say that all taxes go on to be spent for poor. Is there going to be an ‘earmarked’ fund for such GST on health care to be used for specified purpose ? Perhaps No. Then why to make such claims.

The logic behind taxing rooms in hospital with tariff exceeding Rs. 5000 per day sounds illogical i.e., it is affordable and that Rs. 250/- per day would not be much of additional burden. Further, argument that very few hospitals would be affected as such rooms are not much in numbers in the country also does not carry weight as only a few rooms come with a charge of more than Rs. 5000. Another reasons cited are of inverted duty structure and consequent refund, i.e., higher duty on input and lower duty on output. Moreover, such 5% levy of GST is on non-ICU rooms. There will be no GST if ICU room rent exceeds Rs. 5000 a day. One more argument which does not sounds logical is that in a typical overall health-care package, various components  such as consumables, pharmacy etc are taxed @5%, 12% or 18%. It those are taxed, why not room rent ?

The levy of GST on hospital room rent where rooms rent exceeds Rs. 5000 per day may lead to complexity of transaction itself and will make accounting and compliance burdensome. It would result into following possible issues and concerns:

• • Presently health care services are considered as composite supplies as most of the services are provided in composite manner and / or as a package for a single price which include advice, treatment, operation, medicines, nursing and accommodation, where required. Such services are exempt and there are many advance rulings to this effect. Charging GST on only room charges wherever applicable, would distort the tax policy and concept of composite/mixed supply itself.
  • Health care units will have to spilt their transaction value to show room charges separately in invoice which will in most cases become a point of dispute.
  • Charging tax on hospital room rent would also distort the settled practice of billing, accounting, taxation and even treatment policies / packages of health care units.
  • Insurance companies may also not consider reimbursement of GST amount in the existing medical health policies.
  • Since health-care is exempt and now room charges will be taxed, such health care units will have to change their transaction model, valuation norms, invoice pattern and accounting.
  • Input tax credit mechanism would not be available, become complicated because of ratio and result into tax audit / assessment disputes
  • Something which is otherwise a composite supply will have to be artificially bifurcated, just to pay tax on room charges, though it may be an integral part of overall health care service.

• • It is not known if CBIC at a later point of time makes the tax payable on room charges under reverse charge basis.
  • Going by the creative instinct of tax audit being done by the department, they may even treat such combination of services (i.e., room accommodation and health care) a case of mixed supply and attempt to tax accordingly.

The proposal to tax hospital rooms will also breed mistrust between assessee and tax authorities as health care units may, to be out of tax net, even tweak their room tariff to be below Rs. 5000 which is purely a commercial decision. In such cases, commercial wisdom will prevail and tax authorities can not question such decisions as it is none of their prerogative.

Before signing off, to tax or not to tax is a legislative power given to legislature. But how to take out a drop of water from a sealed bottle is something to be learnt from tax collectors. Let what is not taxable not be taxed, what can not be spared be only taxed but let not the brilliant but not legally sustainable ideas be allowed to be nurtured. If tax is collected in such a manner, it is for sure that we are all going to land up in avoidable litigation and destructive business practices.

Moreover, when government itself admits that the universe of taxation for hospital room charges is miniscule, then what is the great purpose it seeks to achieve. It is hoped that the decision to tax hospital room charges without GST should be rolled back.