Assessment of Private Hospitals,
Nursing Homes/Medical Clinics,
Medical Colleges/Research Institutes,
Diagnostic Centers, Pathological Labs and
other Medical Supplies Agencies/Stores

Comptroller and Auditor General of India
Union Government
Department of Revenue – Direct Taxes
Report No. 27 of 2017
(Performance Audit)

The Comptroller & Auditor General of India (C&AG) carried out a Performance Audit on Assessment Of Private Hospitals, Nursing Homes/Medical Clinics, Medical Colleges/Research Institutes, Diagnostic Centers, Pathological Labs and other Medical Supplies Agencies/Stores during the period from July 2016 to November 2016. The Report was laid on the floor of the Parliament.

(The complete report on the topic “Assessment Of Private Hospitals, Nursing Homes/Medical Clinics, Medical Colleges/Research Institutes, Diagnostic Centers, Pathological Labs and other Medical Supplies Agencies/Stores” in English and Hindi, is contained in the CD enclosed with the booklet. The Audit Report is also available on our website:http//www.cag.gov.in)

INTRODUCTION

Indian healthcare sector is one of the fastest growing service areas and has witnessed significant growth in terms of revenue and employment in recent years. The healthcare sector comprises both private and public sectors. The private sector provides nearly 80 per cent of outpatient care and about 60 per cent of inpatient care. The private health care sector comprises organizations that operate both on profit and not-for-profit basis. It is important for the revenue department to ensure that the income tax is duly levied and collected based on all incomes generated from these services. Given the special nature of business, Income Tax Department (ITD) is required to be adequately equipped and vigilant while dealing with assessees engaged in the business of providing health related services. As this sector is expanding very fast, the source of investment or acquisition of assets requires proper verification to plug the loopholes on any possible transfer of money from untaxed sources or unaccounted funds for such investments.

WHY WE CHOSE THE TOPIC

> The health sector has witnessed a robust annual growth in the recent years with many new private healthcare institutions coming up in the country and having a dominant presence in medical education and training, hospital infrastructure and ancillary service areas such as medical technology and diagnostics.

> The fees charged by health professionals, private hospitals, nursing homes, medical clinics, medical colleges, diagnostic centres, pathological labs, medical supply stores for their services are mostly received in cash, which is a high-risk area with potential for evasion of tax.

AUDIT OBJECTIVES

The audit objectives of the Performance Audit were to:

(i) assess the achievement of objectives behind the introduction of tax incentives specific to the healthcare sector;

(ii) derive an assurance that the existing systems and controls are adequate for compliance of provisions specific to the healthcare institutions and medical professionals under the Income Tax Act;

(iii) examine whether all types of healthcare institutions were effectively covered in the tax net of the Income Tax Department (ITD) and to assess the adequacy of efforts made by the ITD towards this.

AUDIT COVERAGE

The audit covered assessment cases relating to Private Hospitals, Nursing Homes/Medical Clinics, Medical Colleges/Research Institutes, Diagnostic Centers, Pathological Labs and other Medical Supplies Agencies/Stores, including those running on ‘not-for-profit basis’, and healthcare delivery professionals. The audit covered cases of scrutiny assessments, appeal and rectification cases completed during the period from 2012-13 to 2015-16 which were test checked during the period from July 2016 to November 2016. Wherever necessary, assessment records of previous assessment years in respect of the selected assessees were also examined. Within the selected assessment units under different PCsIT/CsIT in 20 states, a total of 3210 assessees were identified for examination in audit, based on the information available in the ‘Demand and Collection Register’ maintained by the selected assessment units and through consultations with the Department.

AUDIT FINDINGS

The following are the major audit observations:

a. Despite the availability of systems viz. Income Tax Payer Data Management System (ITDMS), Non-filers Monitoring System (NMS), Project Insight and other versatile tools for analyzing data collected from external sources for widening of tax base, audit noticed that these were not being effectively utilized/implemented for strengthening and expanding of the tax base in the private healthcare sector and also for identifying the stop-filers and non-filers. The existing tools could not be used to cross-verify whether medical professionals and medical companies/healthcare facilities registered with other registering agencies were effectively covered in the income tax net. Absence of any system of such cross-verification points to the possibility of potential assessees remaining outside the tax net.

b. Audit found that there was no mechanism in existence for the identification of non-filers through NMS in Delhi, Kerala, Rajasthan, Tamil Nadu states. The NMS module also did not have any provision for generating reports based on the nature of business.

c. Surveys, though an effective tool for strengthening the tax base as well as for deterrence against evasion, were not utilised at all in some states during FYs 2012-13 to 2015-16 by the ITD.

d. The Income Tax Act does not prescribe any measurable parameters to assess the extent of charitable activities being undertaken by any hospital trust availing the benefit of exemptions under the Act. This points to the possibility of assessees availing of exemption without actually performing any charitable function. Audit noticed that hospitals in Maharashtra have availed unjustified exemptions amounting to ` 66 crore involving revenue impact of ` 77.14 crore.

e. Audit noticed that in Maharashtra, out of eighty seven cases falling under stand-alone hospital category, the section 80G certificates were available only in 10 per cent of the cases. In the absence of section 80G certificates, it was not clear as to how the Assessing Officers cross-verified the donation receipts vis-à-vis the claims. There is no provision in the ITD module to enable validation of section 80G certificates by Assessing Officers as in done in the case of TDS certificates under TRACES.

f. The provision under section 35AD of the Act does not specify the allowability of deduction on capital investments in cases where the value of land and building were not separable, resulting in allowance of excess deduction and loss of revenue. Capital investment on land is not an allowable deduction under the Act.

g. The “referral fees” paid to the doctors by the private hospitals, nursing homes, diagnostic centres etc. for referring patients and payments made on account of “advertisement expenses” by the medical practitioners were allowed, although such expenditure had been held as disallowable and “unethical” as per CBDT’s directives and laws of the regulatory bodies.

Recommendations

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Systems and mechanism operating within ITD to link third party data

We recommend CBDT to request the registering bodies/ agencies through their administrative Ministries/Departments for introducing a provision of mandatory quoting of PAN details while registering private hospitals, nursing homes/medical clinics, medical colleges/research institutes, diagnostic centres, pathological labs, medical supplies stores etc.

The CBDT replied (May 2017) that requiring mandatory quoting of PAN as a part of registration process for private hospitals, nursing homes/medical clinics, medical colleges/research institutes, diagnostic centers, pathological labs, medical supplies stores of the respective Municipality, State or Central Government was beyond the remit of the Income Tax Department.

Audit is of the view that in such cases CBDT may reconsider instituting an appropriate mechanism to ensure that all potential assessees are included in the taxpayer base to reduce the scope of evasion.

Mechanism available with ITD for widening of tax base

We recommend CBDT to modify its existing mechanism to identify non-filer/ stop-filer private companies and registered medical professionals in the healthcare sector to widen its tax base.

The CBDT replied (May 2017) that the non-filer monitoring system (NMS) of ITD identifies the non-filers based on significant financial transactions reported to the ITD by the reporting entities.

Audit is of the view that the CBDT may consider modifying the NMS module to generate sector-specific details of stop-filers and non-filers to widen its tax base.

Surveys under Income Tax Act

We recommend CBDT to use survey operations more effectively to strengthen and expand the tax base of assessees related to the healthcare sector;

The CBDT replied (May 2017) that the Exemption charges have been given power to survey under section 133A of the Income Tax Act, 1961 with effect from 1 April 2017.

The reply is not acceptable as these powers were already bestowed with Assessing Officers prior to this. However, the same were not utilised by them in some states.

Allocation of specific jurisdiction for assessment and codes to assessees related to healthcare sector

We recommend CBDT to allocate specific codifications to different businesses in the healthcare sector that are not covered presently (viz. Medical Clinics, Diagnostic Centres, Pathological labs and other Medical supplies agencies/stores) under the existing codes specific to the healthcare sector.

The CBDT agreed during Exit Conference (May 2017) to examine this issue.

Non-filers Monitoring System (NMS) and action taken on NMS data

We recommend CBDT to introduce a provision for generating sector specific data in the NMS module.

The CBDT replied (May 2017) that the recommendation was already included in NMS criteria.

The reply is not acceptable as the NMS module did not have any provision for generating reports pertaining to the healthcare sector at all, and within the healthcare sector, reports based on the nature of business (hospitals, nursing homes, diagnostic centres, pathological labs, professionals etc.).

Selection criteria for scrutiny

We recommend CBDT to review the criteria built into CASS particularly in respect of Charitable Trust Hospitals which are high risk areas.

The CBDT replied (May 2017) that the recommendation was already included in CASS module.

The reply is not acceptable as audit noticed instances where trusts having significant amount of gross receipts had not been selected for scrutiny. As the assessment of charitable trusts is a

high risk area, CBDT may reconsider the audit recommendation.

Lack of measurable definition of “charitable Purpose”

We recommend CBDT to consider prescribing measurable parameters for assessment of charitable activities undertaken by private hospital trusts as a pre-condition for granting exemptions under the Income Tax Act, and amend the Act for this purpose if necessary.

The CBDT replied (May 2017) that the financial transaction such as cash deposits, interest Income etc. are reported by reporting entities. The cases for scrutiny are selected based on such information and the information available in the Income Tax returns.

The reply does not address the issue under audit recommendation. The CBDT may reconsider prescribing measurable and quantifiable parameters with respect to charitable activities being undertaken to prevent the scope of misuse of the provision as observed and pointed by audit.

Lacuna in section 35AD of Income Tax Act

We recommend CBDT to clarify how to assess value of land for the admissibility of deduction under section 35AD of the Income Tax Act in cases where the value of land is a part of the value of the building.

CBDT stated (June 2017) that the value of land can be taken as per the prevalent Circle rates of the land on the date of the sale deed.

Audit is of the view that CBDT may issue a clarification in this regard to ensure uniformity in assessment.

Donations not being watched properly

We recommend CBDT to consider the possibility of introducing automated generation of 80G certificates above a certain threshold.

The CBDT replied (May 2017) that automated generation of 80G certificates on similar lines as under TRACES would not be feasible to implement and would be extremely complicated for small donors and small exempt organizations who would have to submit a statement to the Department and then obtain a certificate to be given to the donor.

Audit is of the view that in the absence of automated mechanism for cross verification of claims made by donors and donees, the chances of ineligible assessees availing deduction cannot be ruled out. CBDT has introduced similar provisions in the case of section 194IA of the Income Tax Act, wherein the purchaser is required to deduct TDS on any property worth Rs. 50 lakh or above. A similar provision indicating a suitable threshold to exclude the small donors may likewise be included. The automated generation of 80G certificates would enhance transparency in the accounting of trusts and facilitate assessment and monitoring of deductions claimed under section 80G of the Act.

Irregular allowance of unlawful expenditure

We recommend CBDT to include the provision of disallowance of expenditure in respect of all kinds of freebies and referral fees paid to medical practitioners as well as advertisement and business promotion expenses within the purview of explanation under section 37 of Income Tax Act 1961 to create an additional deterrence against such unethical practices.

The CBDT replied (May 2017) that any legislative intervention by mentioning specific items as unallowable expenditure under section 37 of the Act will only dilute the wider ambit of explanation 1 to section 37. Thus, according to CBDT, adequate legal provisions exist and necessary circulars have already been issued by it in this regard. Hence no further intervention in the form of legislative enactment to the Act is required in this matter.

The reply is not acceptable. As observed by Audit, the Assessing Officers are taking divergent views due to the lack of clarity in CBDT instructions in this regard. Hence the CBDT may issue further necessary clarifications to ensure uniformity and consistency in assessments, even without amending the law.

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