S Sivakumar, CA

The Finance Bill for 2010-11  has proposed to levy service tax on services related to the transfer of cinematographic films and sound recording under Section 65(105)(zzzzt). As we know, Intellectual Property service in terms of Section 65(55b) of the Finance Act, 1994 means (a) transferring temporarily; or (b) permitting the use or enjoyment of intellectual property right.Intellectual Property Right, in terms of Section 65(55a) means any right to intangible property, namely, trademarks, designs, patents, or any other similar intangible property, under any law for the time being in force but does not include copyright. A transaction where a person is allowed to use an intellectual property right for consideration attracts service tax. The fact however remains, that the use of an intellectual property right is also a transaction involving sale of goods, attracting sales tax or VAT, as Intellectual Property is nothing but ‘goods’. The Hon’ble Supreme Court, in Vikas Sales Corporation v. CCT (1996) 102 STC 106 (SC) has categorically held that rights such as trademarks, patents and right in persona capable of transfer or transmission, such as debts, are also included within the ambit of “goods”. In SPS Jayam & Co. V. Registrar, Tamil Nadu Taxation Special Tribunal and others (2004) 137 STC 117 (Mad), the Madras High Court has held that, a trade mark is an intangible good and that, giving permission to use a trade mark for a certain period is a transfer of right to use goods and not merely a right to enjoy and that, royalty for allowing the use of trade mark attracts sales tax. In A V Meiyappan v. Commissioner of Commercial Taxes, Board of Revenue, Madras and another reported in (1967) 020 STC 0115, the Madras High Court had categorically held that, grant by way of lease of a cinematographic film amounts to a sale of goods, attracting the levy of sales tax. In fact, Entry 34 of the Third Schedule to the Karnataka Value Added Tax Act, 2003 includes DEPB Licenses, Copyrights, Patents and the like including the software licenses by whatever name called. The VAT rate on the distribution of films ranges from 4% in States like Karnataka to 12.5%, as proposed, in Delhi. The Centre’s proposal to levy service tax could immensely add to the woes of the film distributors, leading to a double levy on the same transaction.

Yet another area where the Central Government could get into trouble, is in its proposal to introduce Section 65(105)(zzzzo) in the Finance Act, 1994, which would bring the entire health care sector including hospitals, nursing homes and multi speciality clinics under the service tax net. The taxable service, as proposed in the said Sub Section (zzzzo) is defined to mean services rendered by any hospital, nursing home or multi-specialty clinic,—

(i) to an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or

(ii) to a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;

Currently, Hospitals, Nursing Homes and Multi Speciality Clinics are practically outside the service tax net, except when they render services involving cosmetic surgery or plastic surgery, which were brought into the service tax net in 2009. This proposal would effectively bring them into the service tax, as most of the cases these hospitals, etc. handle are covered by cashless mediclaim policies.

An individual paying directly to the hospital and then claiming a reimbursement from the Insurance Company does not have to bear service tax. But the insurance company paying the amount to the hospital for the same individual’s treatment would need to bear the service tax. Will this anomaly the levy of service tax lead to the old system when individuals were required to meet their hospital expenses and then claim reimbursements?

As such, the premiums are already subject to the levy of service tax and the extension of the levy to cashless mediclaim policy settlements would significantly increase the cost of medical services.

Levy of service tax on Hospitals is not a good idea, especially, considering the fact that they render live saving services.  It looks unfair to bring the health care sector into the service tax net, even when the Task Force appointed by the 13th Finance Commission has, in its report dated December 15, 2009 had recommended that health services should be exempted under the GST regime.

As is the case with the proposal to levy service tax on distribution of films, the levy of service tax on the health care sector could result in a double levy, on the part of the transaction involving the sale of medicines, etc., which is already subjected to the levy of VAT.

Of course, service providers can look forward to availing of the benefit provided by Notification No. 12/2003-ST dated 29th June, 2003, in terms of which, a service provider selling goods as part of the service provider, is entitled to claim an exemption from the service tax levy, on the value of the goods sold as confirmed by documentary evidence. However, we should expect the Department to work towards refusing to extend the benefit of this Notification to the film distribution and health care sector on some pretext or other. Once these proposals are confirmed in the statute book, service providers and especially the hospitals and clinics, would need to put in systems and procedures to bifurcate the value of the medicines and goods sold by them so that, the benefit of Notification No. 12/2003 can be taken.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)

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June 2021