ITC is restricted on medicines used in the supply of health care services – AAR Karnataka

Health care sector is extremely important and at many times life-saving to the economy. Consideringthe significance of these services most of the health care services are exempt from GST.As per Entry Number 74 of Notification No. 12/2017- Central Tax (Rate), exemption is available forservices by way of-

1. Health care services by a clinical establishment, an authorised medical practitioner orparamedics;
2. Transportation of a patient in an ambulance, other than those specified in (a) above.

Some Important Definitions:

Heath care services

• It means any service by way of diagnosis or treatment or care for
• Illness
• Injury
• Deformity
• abnormality or
• pregnancy in any recognised system of medicines in India
• It includes services by way of transportation of the patient to and from a clinicalestablishment.
• It does not include hair transplant or cosmetic or plastic surgery, except when undertaken torestore or to reconstruct anatomy or functions of body affected due to congenital defects,developmental abnormalities, injury or trauma.

Clinical Establishment

• It means a hospital, nursing home, clinic, sanatorium or any other institution by, whatevername called, that offers services or facilities requiring diagnosis or treatment or care forillness, injury, deformity, abnormality or pregnancy in any recognised system of medicines inIndia.
• It could also be place established as an independent entity or a part of an establishment tocarry out diagnostic or investigative services of diseases

Will ITC be available on medicines supplied by hospitals?Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Let us refer to the case of Ambara (GST AAR Karnataka), where the issue under consideration was whether a hospital can avail the benefit of ITC on services provided.

Brief Details about the Applicant:

• M/s Ambara is a partnership firm registered under the provisions of the GST Act, 2017.
• The applicant is engaged in the business of providing health care services and also runs a Hospital in the name of CURA Hospital.
• The applicant provides the services relating to Health Care Services which are in the nature of diagnostic and treatment services, to both in-patients as well as out-patients.
• The applicant, also provides food & beverages, medicines to the in-patients. The applicant has been making item-wise billing to the in-patients & the out-patients. Thus, the applicant supplies medicines to three types of persons, (a) inpatients, (b) out-patients and (c) customers.

The applicant sought advance ruling in respect of the following questions:

• Whether ITC is required to be restricted on medicines supplied to patients admitted in hospital?
• Whether ITC is required to be restricted on medicines supplied to patients treated as out-patients?
• Whether ITC is required to be restricted on medicines supplied to other than inpatients and out-patients?
• Whether input tax is required to be restricted on supply of food and beverages to the patients admitted in hospital?

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Observations of AARon whether ITC is required to be restricted on medicines supplied to patients admitted in hospital?

• The issuewas related to supply of medicines to the in-patients and was about the restriction of the ITC, on such supply.
• The inpatients were the patients admitted in the hospital for health care services. The applicant contends that they were providing a composite supply of health care services.
• Thus, the question was to decide whether the services supplied by the applicant as a part of health care services to the inpatients were composite supply of services or not.
• The contract was for the treatment of the patients and the medicines provided to the patients were in the course of treatment of the patients in the hospital.
• Hence the supply from the applicant hospital to the inpatients was that of supply of health care services only.
• It was clear from the facts of the case, that the applicant was a “clinical establishment” and was providing “health care services”, as per the meaning attributed to those two terms under Notification No. 12/2017 dated 28.06.2017.
• It was also clear that the patients got admitted to the hospital and become inpatients for the treatment of the ailment.
• The patient did not have any choice of the medicines that were being administered and the only thing the patient interested in was the treatment provided for the ailment.
• There was no separate contract for the supply of medicines which was independent of the supply of treatment services. Any medicines which weregiven to the patient were a part of the treatment services and there was no separate supply of medicines to the patients.
• According to Section 2(30) of the CGST Act, 2017, “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods, services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
• In the instant case the supply of medicines was not a distinct supply and the medicines were consumed in the course of supply of treatment services and hence would not constitute a “composite supply” as there was only one supply and that is “treatment of ailment” which was a “health care service”.
• If at all any medicines or any other things were supplied independently, of the treatment services, then that would constitute a separate supply not under the service contract for which the person is admitted to the hospital.
• To constitute a composite supply, there must be two separate taxable supplies and these must be naturally bundled and supplied together.
• In the case of usage of medicines, there are no two supplies which are separate and bundled together and hence would not constitute “composite supply”.
• The treatment services for diseases were “health care services” as defined under Notification No. 12/2017 dated 28.06.2017 and supply of health care services provided by a clinical establishment was exempt from the levy of tax as per entry No. 74 of the said notification.
• Since the output supplies were exempt, the applicant was not eligible to claim the ITC paid on the inward supplies of medicines that are used for providing “health care services” to the inpatients.

Observations of AAR on whether ITC is required to be restricted on medicines supplied to patients treated as out-patients?

• The applicant, in this case, supplied medicines in two ways – one as sale of medicines from his pharmacy counter and the other as a part of the health care services.
• The first type was of the nature of sale of medicines and medicines being taxable goods and the contract was for supply of medicines, the same was liable to tax and the applicant was eligible to claim ITC relating to the taxable supply of medicines.
• In the second type of services, the applicant supplied medicines as a part of the supply contract of health care services and the applicant contended that these services were composite supply of health care services.
• The applicant, while providing treatment to the outpatients, used certain consumables such as medicines, bandages, cotton, etc.
• Hence the medicines, cotton and bandages were consumed in the provision of health care services and the output was only health care services.
• Hence there was no separate / distinct supply of medicines, bandages, cotton etc., and since they were used in the supply of exempt health care services, the impugned supply could not be a composite supply.
• Therefore, the applicant was not eligible to claim ITC on the taxes paid by the applicant on the inward supplies of such goods.

Observation of AAR on whether ITC is required to be restricted on medicines supplied to other than inpatients and out-patients?

The applicant, with regard to the supply of medicines & other goods to the customers, was selling the medicines as a trader and hence they were liable to collect and pay the applicable tax on the goods sold and also was eligible to claim ITC like any supplier of taxable goods, subject to any restrictions in Section 17 of the GST Act.

Observations of AAR on whether ITC is required to be restricted on supply of food and beverages to the patients admitted in hospital?

• The supply of food & beverages to the inpatients could happen in two ways i.e. prescribed diet in accordance with the treatment and food as per the request of the inpatient.
• Thus, with regard to supply of food & other articles to the inpatients in the hospital, the question before AAR was to decide whether the said supply was a part of the health care services or not.
• If the supply of food & beverages was under the prescribed diet as part of the treatment process, and if it was an integral part of the treatment, then the food and beverages loses its identity as a separate supply and merges with the supply of treatment service similar to supply of medicines.
• Thus, the impugned supply of food & beverages was an ancillary to the supply of treatment service i.e. health care service, which is an exempted supply, under entry No.74 of Notification No. 12/2017 dated 28.06.2017. Therefore the applicant can’t claim the input tax credit.
• However, if the supply of food & beverages was at the request of the patient i.e. if it was not a diet but menu was as per the patient’s request, such supply shall maintain separate identity.
• If it was supplied distinctly, then the question arose whether the supply of food and beverages were naturally bundled and supplied in conjunction with the treatment or health care services.
• The Authorised Representative during the personal hearing had confirmed that the applicant did not allow the inpatients to consume outside food.
• Thus, it was inevitable that the impugned supply became naturally bundled with the treatment service i.e. health care service and the supply became a composite supply, which was an exempted supply, under entry No.74 of Notification No. 12/2017 dated 28.06.2017.
• Thus, the applicant can’t claim the input tax credit.

Therefore, in conclusion

• ITC is restricted on medicines used in the supply of health care services provided to inpatients.
• ITC is restricted on medicines used in the supply of health care services provided to outpatients. Further in case medicines are supplied independent of health care services, then one is eligible to claim ITC subject to payment of taxes on such independent supply of medicines.
• ITC is not required to be restricted on medicines supplied to others i.e. customers, who are neither inpatients nor outpatients, as there is no health care service provided and is liable to pay tax on such outward supply of medicines.
• ITC is restricted on supply of food & beverages supplied to inpatients and is part of the health care services.

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