This is the latest twist to the two-year dispute between tax authorities and third party administrators, or TPAs. On Tuesday, the Supreme Court dismissed an appeal against the Bombay High Court order which held that TPAs — which are typically companies that liaise between insurers and hospitals to facilitate cashless treatment for policyholders — should deduct taxes while making payment to hospitals.
This verdict would enable the income-tax department to raise an additional Rs 600 crore annually. The money reimbursed every year to hospitals for cashless services to policyholders amounts to Rs 4,000 crore annually. Of this, 60% is facilitated by the TPAs who pay out of float funds parked with them by non-life insurance companies.
TPAs receive a commission from insurance companies, usually about 5%, on the health insurance premium. I-T authorities claim that TPAs have to deduct tax at the rate of 10% at source before making payments to hospitals. The bench comprising Chief Justice SH Kapadia, Justice KS Radhakrishnan and Justice Swatanter Kumar, advised the petitioner TPA, Dedicated Health Services, to go back to the high court with a review petition if it’s not
satisfied with the order. The Supreme Court has given a deadline of two weeks for filing the review petition.
The Bombay High Court as well as the Karnataka High Court have dismissed the TPAs’ appeal against I-T orders asking them to deduct tax while making payments to hospitals. The Bombay High Court gave a verdict in favour of I-T department in May, 2010.
The I-T department, Mumbai, had carried out surveys last year on six TPAs and raised tax demands ranging from Rs 3 crore to Rs 69 crore. The survey had revealed that none of them had deducted tax while making payments to hospitals, from the fund available to the patients by insurance companies. The I-T authorities, therefore, issued demand notices under section 194 (J) of the Income-Tax Act, which deals with payment for professional services.
The tenor of the I-T department’s argument is that TPAs are obligated to deduct TDS and the critical factor in deciding this issue is the agreement between the TPAs and hospitals. TPAs claim that they don’t make the payment to hospitals in discharge of their own personal liability and responsibility, but only in discharge of the primary liability and responsibility of the insurance companies which provide funds to TPAs in the form of a float account.