ITC is restricted when diagnostic or investigative services are provided – AAR

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. Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.

However, will ITC be available when the applicant is involved in providing exempt services? Let us refer to the advance ruling of Siddalingappa Palalochana Rakshit (Bangalore Medical System) (GST AAR Karnataka) where M/s Bangalore Medical Systems (applicant) filed an application for Advance Ruling on the issue that whether ITC would be available to him or not, considering the fact that he was providing certain exempt services.

Facts of the Case:-

The applicant is a proprietary concern having brand name of “Bangalore Medical System” and registered under GST.
They are into supply of medical consumables (goods) in addition to provision of diagnostic services.
The applicant established a medical diagnostic laboratory to carry out diagnostic or investigative services of diseases the premises of the Kidwai Memorial Institute of Oncology, a Karnataka Government hospital.
The applicant provided the service of diagnostic testing on the samples sent by the hospital. They charged the hospital for the services rendered.
They were allotted space to establish & set up a complete Molecular Diagnostic Laboratory.

All the equipments would be purchased by the applicant and installed at the lab in Kidwai Hospital.
The responsibility of running the lab with all necessary technical staff was on the applicant.
The applicant received the samples from the patients and issued respective reports and charged Kidwai Hospital as per the approved prices.

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

Can the applicant avail GST Input on the equipments, furniture etc. which we are purchasing for this?
Can the applicant avail GST input on the reagents/ consumables they would be purchasing for performing the tests as the reagents / consumables are taxable and not the test?

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Submissions by the Applicant:-

The applicant claimed that the services being provided to the Institute (hospital) were exempted from GST.
Further a lot of fixed assets in the form of instruments, furniture’s and fixtures were purchased and capitalized in the books of accounts.
Thus they were capital goods and hence applicant was eligible to claim ITC on the inward supply of such capital goods.

Reference to Notification No. 12/2017- Central Tax (Rate) by the AAR

AAR proceeded to examine whether the diagnostic services supplied by the applicant to the aforesaid hospital were covered under Entry no. 74 of Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017.

According to Entry no. 74, Services by way of-

Health care services by a clinical establishment, an authorized medical practitioner or paramedics;
Services provided by way of transportation of a patient in an ambulance were exempt from the levy of GST

Observations of the AAR on whether the applicant provided health care services or not

According to the said notification, “health care services” 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 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.

In the instant case the services provided by the applicant were by way of diagnosis of an illness and hence the same were covered under “health care services”

Observations of the AAR on whether the applicant was a clinical establishment or not

AAR proceeded to examine whether the applicant fell under “clinical establishment”, which was defined in clause (s) of paragraph 2 of the said Notification

According to the Notification “clinical establishment” means a hospital, nursing home, clinic, sanatorium or any other institution by whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases;”

In the instant case the applicant established a medical diagnostic laboratory to carry out diagnostic or investigative services of diseases. Thus the applicant qualified to be a clinical establishment.

Observation of the AAR on whether ITC was available to the applicant or not

It was clear that the services provided by the applicant were covered under clause (a) of Entry no. 74 of the Notification No. 12/2017-Central Tax (Rate) and hence were exempt from tax under GST.
The applicant was involved in taxable as well as exempted supplies.
Section 17(2) of the CGST Act, 2017 stipulated that the amount of credit be restricted to the input tax attributable to the taxable supplies including zero rated supplies.
According to Section 17(2), when the goods, services or both were used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, then the amount of credit shall be restricted to the input tax that is attributable to the said taxable supplies including zero-rated supplies.
Therefore the applicant had to restrict the credit to the amount attributable to taxable supplies including zero rated supplies in the case of capital goods as well as reagents/consumables or drugs.
Further if the applicant claimed depreciation on the tax component of capital goods and plant & machinery, under Income Tax Act 1961, the input tax credit on the said tax component shall not be allowed, in terms of Section 16(3) of the CGST Act 2017.

Therefore, the applicant was eligible for input tax credit on the tax paid on the purchases of goods, i.e. equipments, furniture, etc. which were purchased for this project and also on the reagents / consumables which were used for performing the test, subject to the restriction of the same in terms of Section 17(2) of the CGST Act 2017.

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