THIRD Party Administrators (TPAs), which process health insurance claims and make payments to hospitals for treatment of subscribers in cashless systems, may soon have to deduct tax from the payments they make to hospitals. The apex direct tax body, Central Board of Direct Taxes (CBDT), is likely to issue a directive to this effect, said an official with the income-tax department.
The move will increase working capital requirements of hospitals — the TDS rate is a significant 10% of the billed amount and hospitals can claim a refund only when filing their annual tax returns. The additional capital requirement could push up the cost of healthcare for consumers. The move will place additional burden on TPAs as well.
The CBDT’s proposed move comes in wake of a recent Bangalore High Court ruling that made deduction of tax at source mandatory for TPAs. In 2008, tax authorities had carried out surveys on TPAs and raised tax demand on them under Section 194J of the IT Act.
Under this section, providers of professional services have to deduct tax at source from their clients. TPAs had challenged this tax demand on the grounds that they were making payments to hospitals on behalf of individuals (patients) and individuals are exempt from the requirement to deduct tax. The Bangalore High Court, however, upheld the tax authorities’ position.
The question is whether TPAs are required to carry out TDS with retrospective effect or prospectively. If the CBDT wants tax deducted at source retrospectively, it would mean prolonged wrangles between TPAs and hospitals, which are unlikely to cough up tax payments for past periods for which they have already filed tax returns.
Combined burden at Rs 100 cr a year
TPAs will have to pay a penalty as well, and the combined burden for all players could be in the range of Rs 50-100 crore per year.
Usually, taxes deducted by TPAs are set off by hospitals when they file their returns. But receiving lower amounts upfront could mean a cost for hospitals. Hospitals could then pass on the additional cost to consumers, thereby raising cost of healthcare in a country where only 2-3% of the population has a health cover.
According to an executive with a TPA, which has represented to the CBDT on the issue, TPAs could not be brought under TDS as they were only making payments to hospitals on behalf of individuals.
KARNATAKA HIGH COURT CASE LAW AND RULING
Medi Assist TPA vs. DCIT (Karnataka High Court)
The assessee, a Third party Administrator (“TPA”) licensed by IRDA, was engaged in providing “cashless” health insurance claim services. The insurance company issued cashless medi-claim policies (that were serviced through TPAs) under which it assured the policy holder of free treatment up to the assured amount. The TPA issued an identity card to the insured pursuant to which he could approach any network hospital to avail of cashless treatment. Upon treatment, the hospital sent the bill to the TPA and the same would be paid by the TPA to the hospital. The payment would be made from funds made available by the insurance company to the TPA. The assessee also entered into MOUs with hospitals and nursing homes by which it undertook to reimburse / settle the bills of the policy holders. The AO took the view that as the hospitals had rendered professional (‘medical’) services the assessee ought to have deducted tax at source u/s 194J at the time of payment. The assessee filed a writ petition to challenge the said order on the ground that it was not “responsible” for making the payment. HELD, dismissing the petition:
(1) Under the arrangement, it is the TPA who is responsible for making payments to the hospital. The TPA can be termed as an “agent” of the insurance company. The TPA was given unbridled power and had taken over a part of the work of the insurance company. Its decision as to the payment of bill and sending the insured to the accredited hospitals was final and the Insurance company was not in touch with the insured at all;
(2) Another factor which was a pointer to the fact that the TPA was required to deduct tax at source was the mechanism of operation of funds. A claim float account was opened in the name of the TPA into which money would be deposited by the insurer and used by the TPA to pay the hospitals. The funds were replenished by the insurer. The TPA was in control of making payments to the hospitals and the liability of the Insurer was only of replenishing the funds. The control of the funds was with the TPA;
(3) The ‘Service Level Agreement’ entered into by the TPA with the insurance company as well as the agreement entered into by the TPA with the hospital indicated that the TPA was ‘responsible for making payment’ and that it was obliged to deduct the tax at source.
Note: The argument on the basis of Hindustan Coca Cola vs. CIT 293 ITR 226 (SC) that as the hospitals were assessed, the payer cannot be treated as an ‘assessee in default’ was not addressed by the Court.
See also: Mahindra & Mahindra 313 ITR 263 (AT) (Mum.) (SB): The primary liability is of the recipient. Proceedings against the payer are maintainable only if tax cannot be recovered from the recipient.
would you have the relevant judgement of the bangalore high court?