VENTURING INTO TAXING HOSPITAL ROOMS – A BUMPY RIDE

[Dr. Sanjiv Agarwal]

The 47^th GST Council meeting held on 28-29 June, 2022 decided that non-ICU room charges in hospitals shall be taxed @ 5% without input tax credit where room charge is more than Rs. 5000 per day per patient. The recommendation states as follows:

“Room rent (excluding ICU) exceeding Rs. 5000 per day per patient charged by a hospital shall be taxed to be extent of amount charged for the room at 5% without ITC.”

CBIC has issued Notification No. 03/2022-CT (Rate) dated 13.07.2022 amending Notification No. 11/2017-CT (Rate) dated 28.06.2017 by inserting new entry 31A w.e.f. 18.07.2022 to include following service to be taxed @ 5% (2.5% CGST, 2.5% IGST) under the SAC Code 9993:

“Services provided by a clinical establishment by way of providing room [other than Intensive Care Unit ((ICU) / Critical Care Unit (CCU) / Intensive Cardiac Unit (ICCU) / Neo natal Intensive Care Unit (NICU)] having room charges exceeding Rs. 5000 per day to a person receiving health care services.”

This will be subject to condition that the credit of input tax charged on goods and services used in supplying the service has not been taken.

Taxing Hospital Rooms : What’s in Hospital rooms to be taxed if tariff is more than Rs. 5000 per day per patient / person Non- ICU rooms only to be taxed.  ICU rooms spared from GST Tax rate to be 5% on room charges No input tax credit allowed If room shared by more than one patient, room charge threshold of Rs. 5000 to be taken per day per patient. Likely to be effective from 18.07.2022

Recently Revenue Secretary in Ministry of Finance reacted to the voice being raised on taxing @ 5% non-ICU hospital beds having a charge of more than Rs. 5000 per day. According to him, percentage of rooms in hospitals where rooms are charged for more than Rs. 5000 per day are ‘minuscule’ and cannot be said to be affecting affordable health care. One who is able to pay Rs. 5000 can also pay Rs. 5250, i.e. Rs. 250 on account of GST. Levy of GST, that too @ 5% should not be taken as a hit against affordable health care. He has been quoted saying that “this GST, which comes into a common pool, will be used for poor.”-   As if he wants to say that all taxes go on to be spent for poor. Is there going to be an ‘earmarked’ fund for such GST on health care to be used for specified purpose ? Perhaps No.

What is being taxed is only hospital rooms which are charged more than Rs. 5000 per day per patient which leaves a very small scope for taxation of GST on such rooms. Even if hospital rooms are taxed, there will be rooms which are out of GST tax net, i.e.,

1. Room below or upto Rs. 5000
2. Rooms above Rs. 5000 if shared by more than one person such that effective tariff is upto Rs. 5000 per day per patient / person
3. Non-ICU rooms

Levy of GST on Hospital Rooms

Hospital Rooms

Taxable

Non-taxable

Non-ICU rooms

Tariff > Rs. 5000 per day per  patient/persons

All ICU rooms

Other room tariff upto Rs. 5000 per room per patient/person

Taxed @ 5%

No ITC

The logic behind taxing rooms in hospital with tariff exceeding Rs. 5000 per day sounds illogical i.e., it is affordable and that Rs. 250/- per day would not be much of additional burden. Further, argument that very few hospitals would be affected as such rooms are not much in numbers in the country also does not carry weight as only a few rooms come with a charge of more than Rs. 5000. Another reasons cited are of inverted duty structure and consequent refund, i.e., higher duty on input and lower duty on output. Moreover, such 5% levy of GST is on non-ICU rooms. There will be no GST if ICU room rent exceeds Rs. 5000 a day. One more argument which does not sounds logical is that in a typical overall health-care package, various components  such as consumables, pharmacy etc are taxed @5%, 12% or 18%. It those are taxed, why not room rent ?

The levy of GST on hospital room rent where rooms rent exceeds Rs. 5000 per day may lead to complexity of transaction itself and will make accounting and compliance burdensome. It would result into following possible issues and concerns:

• Presently health care services are considered as composite supplies as most of the services are provided in composite manner and / or as a package for a single price which include advice, treatment, operation, medicines, nursing and accommodation, where required. Such services are exempt and there are many advance rulings to this effect. Charging GST on only room charges wherever applicable, would distort the tax policy and concept of composite/mixed supply itself.
• Health care units will have to spilt their transaction value to show room charges separately in invoice which will in most cases become a point of dispute.
• Charging tax on hospital room rent would also distort the settled practice of billing, accounting, taxation and even treatment policies / packages of health care units.
• Insurance companies may also not consider reimbursement of GST amount in the existing medical health policies.
• Since health-care is exempt and now room charges will be taxed, such health care units will have to change their transaction model, valuation norms, invoice pattern and accounting.
• Input tax credit mechanism would not be available, become complicated because of ratio and result into tax audit / assessment disputes
• Something which is otherwise a composite supply will have to be artificially bifurcated, just to pay tax on room charges, though it may be an integral part of overall health care service.
• Going by the creative instinct of tax audit being done by the department, they may even treat such combination of services (i.e., room accommodation and health care) a case of mixed supply and attempt to tax accordingly.

The proposal to tax hospital rooms will also breed mistrust between assessee and tax authorities as health care units may, to be out of tax net, even tweak their room tariff to be below Rs. 5000 or even converting non-ICU rooms into ICU rooms which is purely a commercial decision. In such cases, commercial wisdom will prevail and tax authorities can not question such decisions as it is none of their prerogative nor it may be considered a case of tax evasion.

Before signing off, to tax or not to tax is a legislative power given to legislature. But how to take out a drop of water from a sealed bottle is something to be learnt from tax collectors. Let what is not taxable not be taxed, what can not be spared be only taxed but let not the brilliant but not legally sustainable ideas be allowed to be nurtured. If tax is collected in such a manner, it is for sure that we are all going to land up in avoidable litigation and destructive business practices.

Moreover, when government itself admits that the universe of taxation for hospital room charges is miniscule, then what great purpose it seeks to achieve by taxing hospital rooms which is not a very big number. It is hoped that the decision to tax hospital room charges without GST should be rolled back.