The forthcoming budget may have provisions binding on the third party administrators (TPAs), the entities that network between insurers and hospitals to facilitate cashless treatment for policyholders, to deduct tax at source (TDS) before making payments to hospitals.
The rationale for the finance ministry to make it mandatory for TPAs to pay TDS before reimbursing that to hospitals is on account of a slew of cases filed by TPAs against the Income-Tax (I-T) department. Here, the department took a stand that TDS was payable by TPAs.

The money reimbursed annually to hospitals — for cashless services to policyholders — is estimated to be around Rs 4,000 crore. Of this, 60% is facilitated by TPAs, who make the payment out-of-float funds that are parked with them by non-life insurance companies. In return for their services, TPAs receive a commission from insurance companies of about 5% on the health insurance premium.

The I-T department wants TPAs to deduct 10% tax at source before making payments to hospitals. A Karnataka HC verdict last year, in the case of Medi Assist, had favoured the I-T department’s stand, following which a group of TPAs moved the high courts in Mumbai and Delhi, which at present are hearing these cases. The Karnataka HC had observed that since it involved TPA, the authority that makes payments to hospitals, it was, therefore, obligated to deduct TDS.

The court had also observed that the critical factor in deciding this issue was the fact that the agreement relating to paying the hospitals was between TPA and them. The I-T department in Mumbai had raised a tax demand of Rs 117 crore last year on a host of TPAs that operated out of the city. The department raised the demand after conducting a survey on TPAs in the city. Here, it was revealed that none of them had deducted TDS, while making payment to hospitals.

This demand was raised under Section 194 (J) of the I-T Act. The rate of tax stipulated under this Section is 10%, if the payment is a fee for professional services or a fee for technical services or royalty.

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