2025 (7) TMI 194 - AAR - GST

Taxability of medicines and medical supplies to patients - applicability of N/N. 1/2017-Central Tax (Rate) dated 28-06-2017 - Supply of medicines implants and other supplies to inpatients - Supplies made to patients who are not admitted to the hospital but who receive treatment as outpatients - Supply of medicines and other supplies to patients based on a doctor s prescription specifically for consumption at home and during follow-up care - Taxability - medicines and medical supplies to patients - applicability of N/N. 1/2017-Central Tax (Rate) dated 28-06-2017 - HELD THAT - In accordance with the provisions of Section 2(30) of the CGST Act where the supply of medicines or medical items is naturally bundled with healthcare services-such as in the course of diagnosis treatment or care for illness injury deformity abnormality or pregnancy in any recognised system of medicine in India-the entire supply qualifies as a composite supply. In such cases the principal supply is the provision of healthcare services by a clinical establishment an authorised medical practitioner or paramedics. Consequently any medicines and medical supplies that are naturally bundled with such healthcare services inherit the nature of the principal supply and therefore become eligible for GST exemption - This interpretation is also supported by Circular No. 32/06/2018-GST dated 12-02-2018 wherein it was clarified that Food supplied to the in-patients as advised by the doctor/nutritionist is a part of the composite supply of healthcare and not separately taxable. Accordingly the underlying principle is that healthcare services are exempt from GST. When medicines and medical products are supplied as part of a naturally bundled package with healthcare services the entire supply is treated as a composite supply and the exemption available to healthcare services under GST applies to the entire transaction including the medicines and medical products. In the case of outpatients hospitals generally prescribe medicines but do not administer or remain involved in their continuous treatment. It is entirely up to the patient to decide whether to follow the prescription and if so from where to procure the medicines. The choice to purchase or not or to source them from an external pharmacy lies solely with the patient. Because the hospital does not exercise control over the patient s continuing treatment after the consultation such supplies of medicines or consumables cannot be said to be naturally bundled with healthcare services. Consequently they do not qualify as a composite supply. As a result the GST exemption applicable to healthcare services does not extend to such supplies of medicines or allied goods and these are accordingly treated as taxable supplies under GST. Supply of medicines implants and other supplies to inpatients - HELD THAT - The supply of these items are naturally bundled with supply of health care services as discussed above. Therefore such supplies are eligible for exemption under Entry No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28-06-2017 subject to the conditions stipulated in the Notification. Supplies made to patients who are not admitted to the hospital but who receive treatment as outpatients - HELD THAT - The medicines and other supplies provided to patients are naturally bundled with the underlying health care services. Importantly the law does not create a distinction between inpatients and outpatients for the purpose of granting exemption. Instead the eligibility for exemption must be assessed on the basis of whether the supplies are part of a composite supply of medical services. Therefore where a hospital provides treatment to patients without admitting them such as in the case of dialysis dressing chemotherapy minor surgeries or other similar procedures-including pre-admission care like services rendered in casualty-the exemption shall apply provided that the medicines and supplies are naturally bundled with the delivery of health care services. However it is important to note that the exemption is limited to cases where the supplies are part of a naturally bundled package of health care services delivered within the hospital. Supply of medicines and other supplies to patients based on a doctor s prescription specifically for consumption at home and during follow-up care - HELD THAT - These supplies are not naturally bundled with the provision of health care services. Since the hospital s involvement is limited to prescribing and dispensing the medicines-without continuous treatment or direct supervision-the supply of medicines in this context does not constitute a composite supply of health care services. Accordingly such supplies fall outside the ambit of health care services as defined for GST purposes and therefore are not eligible for the exemption granted to health care services. However the exemption from GST on supplies made to inpatients or outpatients as part of their treatment within the hospital does not apply when medicines or other items are sold to them with GST. In such cases since GST has been collected it must be paid to the government as per Section 76 of the CGST Act 2017.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) relate to the applicability of Goods and Services Tax (GST) on the supply of medicines, implants, and other consumables by a hospital to patients in various treatment scenarios. Specifically, the issues are:

• Whether GST is leviable on the supply of medicines, implants, and other supplies issued to in-patients during the course of treatment under different charging mechanisms, including full package, partial package, or separate billing;
• Whether GST is leviable on the supply of medicines, implants, and other supplies issued to patients receiving treatment as outpatients, including dialysis, dressing, chemotherapy, minor surgeries, and pre-admission services;
• Whether GST is leviable on the supply of medicines and other consumables issued to patients based on a doctor's prescription for consumption at home or follow-up care, where the hospital accepts returns of unused medicines as per doctor's instructions;
• Clarification on the interpretation of "composite supply" in the context of healthcare services and supplies;
• Determination of the scope of exemption under Entry No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28-06-2017 concerning healthcare services and related supplies.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: GST Applicability on Supplies to In-patients

Relevant legal framework and precedents: Section 9(1) of the CGST Act, 2017 imposes GST on intra-State supply of goods or services, except alcoholic liquor for human consumption. Entry No. 74 of Notification No. 12/2017-Central Tax (Rate) exempts healthcare services by clinical establishments, authorized medical practitioners, or paramedics. Section 2(30) defines "composite supply" as a supply comprising two or more taxable supplies naturally bundled in the ordinary course of business, with one being the principal supply. Circular No. 32/06/2018-GST clarifies that food supplied to in-patients as advised by doctors forms part of composite healthcare supply and is exempt.

Precedents from various Advance Ruling Authorities (e.g., Ernakulam Medical Centre, Baby Memorial Hospital, St. Thomas Hospital, CMC Vellore) consistently uphold that supplies naturally bundled with healthcare services form a composite supply exempt under Entry No. 74.

Court's interpretation and reasoning: The AAR interpreted that medicines, implants, and consumables supplied to in-patients during treatment are naturally bundled with healthcare services, the principal supply. Regardless of the charging method-full package, partial package, or separate billing-the supply forms a composite supply and qualifies for exemption under Entry No. 74.

Key evidence and findings: The hospital's practice of issuing tax invoices with GST disclosure, the nature of continuous treatment and control over supply, and the legal definition of composite supply supported the conclusion that these supplies are integral to healthcare services.

Application of law to facts: Since the supplies are integral and naturally bundled with healthcare services rendered to admitted patients, the entire supply, including medicines and implants, inherits the principal supply's exempt status.

Treatment of competing arguments: The applicant's contention that even when medicines constitute a major portion of the billed amount, the exemption applies was accepted. The AAR distinguished this from supplies made outside the composite supply framework.

Conclusion: GST is not leviable on medicines, implants, and other supplies issued to in-patients during treatment, irrespective of the billing method, as they form part of the composite supply of healthcare services exempt under Entry No. 74.

Issue 2: GST Applicability on Supplies to Outpatients Receiving Treatment Without Admission

Relevant legal framework and precedents: The definition of healthcare services under Notification No. 12/2017 includes diagnosis, treatment, or care for illness or injury in any recognized system of medicine. The CGST Act does not expressly distinguish between inpatients and outpatients. Previous rulings have addressed the natural bundling principle for composite supplies.

Court's interpretation and reasoning: The AAR held that treatment services such as dialysis, dressing, chemotherapy, minor surgeries, and pre-admission services like casualty care, though rendered without admission, fall within the scope of healthcare services. Medicines and supplies provided during such treatment are naturally bundled with the healthcare services and thus form part of the composite supply eligible for exemption.

Key evidence and findings: The hospital's continuous involvement in treatment during these procedures and the natural bundling of supplies with healthcare services supported the exemption claim.

Application of law to facts: Since the supplies are integral to healthcare services rendered even in outpatient scenarios where treatment is delivered within the hospital, they qualify for exemption under Entry No. 74.

Treatment of competing arguments: The AAR clarified that the exemption is limited to supplies naturally bundled with healthcare services delivered within the hospital and does not extend to supplies merely prescribed but not administered or controlled by the hospital.

Conclusion: GST is not leviable on medicines, implants, and other supplies issued to outpatients receiving treatment within the hospital as part of a naturally bundled composite supply of healthcare services.

Issue 3: GST Applicability on Supplies of Medicines for Home Consumption Based on Prescription

Relevant legal framework and precedents: The CGST Act and Notification No. 12/2017 do not specifically address supplies of medicines dispensed for home consumption post-treatment. The natural bundling principle and composite supply definition are central to the analysis.

Court's interpretation and reasoning: The AAR observed that when medicines and supplies are issued based on prescription for consumption at home, without continuous treatment or supervision by the hospital, these supplies are not naturally bundled with healthcare services. The hospital's role is limited to prescribing and dispensing, and the patient controls procurement and consumption.

Key evidence and findings: The hospital's acceptance of returns of unused medicines per doctor's instructions does not alter the nature of the supply. The absence of continuous treatment or supervision means the supply is separate from healthcare services.

Application of law to facts: Since the supply is not part of a composite supply with healthcare services, it is taxable under GST.

Treatment of competing arguments: The applicant's request for exemption in such cases was rejected based on the legal distinction between naturally bundled supplies and independent supplies.

Conclusion: GST is leviable on medicines and supplies issued on prescription for home consumption and follow-up care, as these do not form part of the composite supply of healthcare services.

Issue 4: Interpretation of Composite Supply and Scope of Exemption

Relevant legal framework and precedents: Section 2(30) of the CGST Act defines composite supply. CBIC Circular No. 32/06/2018-GST and other rulings clarify that naturally bundled supplies with healthcare services form a composite supply exempt under Entry No. 74.

Court's interpretation and reasoning: The AAR emphasized that the principal supply in healthcare composite supplies is the healthcare service itself. Supplies naturally bundled and supplied in conjunction with healthcare services inherit the exemption. The exemption applies regardless of billing method or whether the supply is part of a package.

Key evidence and findings: The hospital's operational practices, legal definitions, and prior rulings consistently support this interpretation.

Application of law to facts: This principle was applied to distinguish exempt supplies (naturally bundled with healthcare services) from taxable supplies (not bundled or separately charged).

Treatment of competing arguments: The AAR rejected arguments that the exemption should not apply when medicines form a major portion of the cost or when supplies are separately billed, provided they are naturally bundled with healthcare services.

Conclusion: The exemption under Entry No. 74 applies to composite supplies where healthcare services are the principal supply and other goods or services are naturally bundled with it.

3. SIGNIFICANT HOLDINGS

"Where the supply of medicines or medical items is naturally bundled with healthcare services-such as in the course of diagnosis, treatment, or care for illness, injury, deformity, abnormality, or pregnancy in any recognised system of medicine in India-the entire supply qualifies as a composite supply. In such cases, the principal supply is the provision of healthcare services by a clinical establishment, an authorised medical practitioner, or paramedics. Consequently, any medicines and medical supplies that are naturally bundled with such healthcare services inherit the nature of the principal supply and therefore become eligible for GST exemption."

"The exemption under Entry No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28-06-2017 applies irrespective of how the treatment is charged, whether on full package basis, partial package basis or without any package. The exemption is also applicable even if the cost of medicines constitutes the major share of the treatment expenses so long as the principal supply involved is supply of health care services."

"Where a hospital provides treatment to patients without admitting them, such as in the case of dialysis, dressing, chemotherapy, minor surgeries, or other similar procedures-including pre-admission care like services rendered in casualty-the supply of medicines, implants and other supplies during the course of treatment fall under the composite supply of health care services and are exempted under Entry No. 74. However, the exemption is limited to cases where the supplies are part of a naturally bundled package of health care services delivered within the hospital."

"Medicines and other supplies issued to patients based on a doctor's prescription for consumption at home and follow-up care, where the hospital accepts returns of unused medicines as per doctor's instructions, do not constitute a composite supply with healthcare services and are therefore liable to GST."

Final determinations:

• Supply of medicines, implants, and consumables to in-patients during treatment forms a composite supply with healthcare services and is exempt from GST under Entry No. 74.
• Supply of such items to outpatients receiving treatment within the hospital (e.g., dialysis, chemotherapy) also forms a composite supply and is exempt.
• Supply of medicines and consumables prescribed for home consumption or follow-up care is a separate supply and is subject to GST.
• The exemption applies regardless of billing methods or whether the supply is part of a package, provided the supplies are naturally bundled with healthcare services.