Ancillary supplies to Health Care Services

[CA Akash Phophalia]

Whether medicines, consumables and implants used in the course of providing health care services are taxable?

Introduction

Health care services always enjoy a special place in the revenue laws. Generally, health care services provided to treat the deficiency and for diagnosis of any disease is exempted form payment of tax. In this article author aims to discuss the implication about the taxability of the ancillary supplies made to patients during the course of provision of health care services.

Meaning of Health Care Services

Health care services means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma.

From the perusal of the above definition as mentioned in 2(zg) to the notification no 12/2017-Central Tax (Rate) dated 28-06-2017 it can be fairly understood that the services to treat any deficiency or diagnosis of any disease are the health care services and such services shall be exempted from payment of GST also. However, where cosmetic or plastic surgery or hair transplant is done for the purpose other than treatment of any deficiency or disease is taxable. Thus where hair transplant is undertaken to improve looks and style of any person, such service shall be taxable.

Ancillary services

Generally hospitals provide health care services are provided to Out-patients and In-patients for administrative convenience. The in-patients are those who are admitted in to the hospital for the required treatment. The out-patients are those who visit the hospital. for routine check-ups or clinical visits.

The medicines, consumables and implants are generally used in the course of providing services to the patients admitted for diagnosis or treatment in the hospital or clinical establishment is naturally bundled in the ordinary course of business. Now the moot question arises whether the said medicines, consumables and implants used for providing services to the patients admitted are taxable as an independent supply or whether the supply of medicines, consumables and implants alongwith health care services shall be classified as supply of health care services or supply of medicines.  

Naturally bundled services

The concept of naturally bundled services was explained in the Education Guide issued by the C.B.E. & C. in the year 2012 (the Education Guide) and the same is borrowed in explaining the meaning of naturally bundled services under GST law vide CBEC Flyer No 4 dated 1-1-2018. The relevant extract is reproduced as under for ease of reference:

Bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.’

The rule is - ‘If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character’

Clarification by Government

A circular was issued by the government vide Circular No 32/06/2018-GST dated 12-2-2018 wherein at Serial No5 it has clarified certain services supplied during provision of health care services by hospitals. The relevant extract is reproduced here for quick reference:-

1. Retention Money - Hospitals charge the patients, say, ₹ 10000/- and pay to the consultants/technicians only ₹ 7500/- and keep the balance for providing ancillary services which include nursing care, infrastructure facilities, paramedic care, emergency services, checking of temperature, weight, blood pressure, etc. Will GST be applicable on such money retained by the hospitals?

Healthcare services have been defined to mean any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India [para 2(zg) of notification No. 12/2017-C.T. (Rate)]. Therefore, hospitals also provide healthcare services. The entire amount charged by them from the patients including the retention money and the fee/payments made to the doctors etc., is towards the healthcare services provided by the hospitals to the patients and is exempt.

2. Food supplied to the patients : Health care services provided by the clinical establishments will include food supplied to the patients; but such food may be prepared by the canteens run by the hospitals or may be outsourced by the Hospitals from outdoor caterers. When outsourced, there should be no ambiguity that the suppliers shall charge tax as applicable and hospital will get no ITC. If hospitals have their own canteens and prepare their own food; then no ITC will be available on inputs including capital goods and in turn if they supply food to the doctors and their staff; such supplies, even when not charged, may be subjected to GST.

Food supplied to the in-patients as advised by the doctor/nutritionists is a part of composite supply of healthcare and not separately taxable. Other supplies of food by a hospital to patients (not admitted) or their attendants or visitors are taxable.

Discussion

Generally, patients are admitted to the hospital when they are extremely ill or have severe physical trauma. As far as an in-patients are concerned, hospital is expected to provided lodging, care, medicine and food as part of treatment under supervision till discharge from hospital. The nature of the various services in a bundle of services will help in determining whether the services are bundled in the course of business. If the nature of services is such that one of the services is the, main services and other services combined with such services are in the nature of incidental or ancillary services which help in better utility of main services then the various element of the services are said to be naturally bundled in course of business. Hence the medicines, implants, room provided on rent, dietary food advised by nutritionists etc. used in course of providing. Health care services to the patients admitted for diagnosis or treatment in the hospitals or clinical establishment is undoubtedly naturally bundled in course of business. The patients expected to receive health care services by way of appropriate diagnosis, appropriate medicines as well as relevant consumables or implants required to make sure that they receive the best possible treatment. Hence the medicines and allied goods supplied to in patients are indispensible items of the treatment items of the treatment and it is a composite supply to facilitate health care services.

Pharmacy is an outlet to dispense medicines or allied items based on prescription. The in-patients pharmacy and operation theater pharmacy supplied medicines and consumables only to in patients. Whereas an outpatient is concerned, hospitals give only prescription, which is an advisory in nature. The patient has absolute freedom to follow the prescription or not. Similarly there is freedom to procure   the medicines or allied items prescribed, either from the pharmacy run by hospital or form any other medicines dispensing outlets. Hospital reserves no control over his continuous treatment. As far as an outpatient is concerned there is no difference for procuring medicine either from the dispensing outlet within the hospital or from outside the hospital. In both places medicines dispensed based on prescription. Hence there is no privilege for the hospitals that are dispensing medicines to outpatients. Therefore pharmacy run by hospital dispensing medicine to outpatient or bystanders or others can be treated as individual supply of medicine not covered under the ambit of heath care services. Hence such supply of medicine and allied goods are taxable.

Conclusion

In view of the above analysis, legal canons and decision by AAR in 2018 (18) GSTL 831 (AAR-GST) IN RE: KIMS HEALTH CARE MANAGEMENT LTD [ 2018 (11) TMI 281 - AUTHORITY FOR ADVANCE RULINGS, KERALA ], the conclusions can be drawn as under:-

Situation	Kind of service	Taxability	Remarks
I	Out-patient services (Diagnosis or Treatment)	Not-taxable	Such service shall be classified as health care service.
II	Out-Patient services (Sale of Pharmacy)	Taxable	It is supply of medicines and not supply of health care services.
III	Out-Patient services (Diagnosis or treatment coupled with sale of pharmacy)	Not-taxable	Such service shall be bundled service in the ordinary course of business and will be classified as health care services.
IV	In-patient services	Not-taxable	Such service shall be Health care service even if coupled with supply of food, medicines, consumables and implants.