Surbhi Premi, Joint Director, Lakshmikumaran & Sridharan advises the healthcare sector to carefully analyse NPPA orders to fix their margins and opines that hospitals should strategise their operations to ensure that the input GST does not hit their pricing
Though healthcare services have been exempted from GST, hospitals witnessing the impact of GST under the price notifications (‘orders’) issued by the National Pharmaceutical Pricing Authority (‘NPPA’), the drug price regulator in India to fix pricing of drugs/formulations and implants under the provisions of the Drugs (Prices Control) Order (‘DPCO’).
There are variety of orders issued by the NPPA. Some of them fix the retail price of drugs/formulations and implants. There are orders prescribing the ceiling price. There are even orders that prescribe limit on trade margin along with the ceiling price. The terms retail price, ceiling price and trade margin involve their own nuances. Most of the orders provide that no additional charge, whatsoever, over and above the specified limit shall be charged from the consumer/patient except applicable GST, if any, paid or payable. Therefore, from the prima facie reading of the orders, one may form a view that the GST is payable extra and hence, it should not impact the pricing and the margins of the hospitals.
These orders should be carefully analysed to understand whether these orders are applicable only on the trading transaction or service transactions also. Further, whether the supplier can collect GST on the supply of medicines and implants over and above the MRP etc. under these orders. First, let us have a look at the practices followed by the hospitals for OPD and IPD patients to understand the impact of GST on their operations.
In case of OPD patients, drugs are supplied separately for a charge along with applicable GST whereas the healthcare services are treated as GST exempt services. In case of IPD patients, during medical treatment, the patients are administered different drugs, consumables, implants, etc. as per medical requirement along with other medical procedure like investigation under pathology and radiology etc. The IPD patients get admitted to the hospital with an objective to get ailment treated and in the course of such treatment, doctors may prescribe certain medicines/ drugs to the patients.
What the consumer seeks, therefore, is the treatment of his ailment by the expert doctors and paramedics, which involves administration of medicines, drugs etc., as advised by the doctors as part and parcel of such treatment. However, it has always been a bone of contention between the tax department and the assessee whether the medicines, drugs, stents, valves, implants and other consumables provided to patients during medical treatment is composite supply of healthcare service or supply of goods. Similar issues have arisen in foreign jurisprudence also.
In the case of Nuffield Health, [2013] UKFTT 291, it was held by the foreign court that it is not the patient who determines the nature or quantity of the drugs he is provided with, even if this is separately itemised on an invoice. In the absence of any significant element of choice in relation to the volume or nature of drugs provided, the economic reality is that that provision is not dissociable from all the other elements that Nuffield provides as part of a single supply of medical and hospital care. Similarly, in the case of the prostheses any element of patient choice is subject to the overall clinical judgment as to the identification of the patient’s needs and the appropriate appliance. The court further stated that if the provision of drugs or prostheses were separate supplies of goods, it would follow that the provision of other goods used, such as needles, drips, tubes etc. as itemised on an invoice should also be treated as separate supplies which would be wholly artificial split of leading to a potential distortion of the functioning of the VAT system. In the case of General Healthcare, [2016] UKUT 315 (TCC), UK Upper Tax Tribunal also held that supply of drugs and prostheses during the course of treatment shall qualify to be supply of health care services.
The Punjab and Haryana High Court in the case of Fortis Healthcare (2015 VIL 73 P&H) examined the exigibility of medicines, drugs, stents, valves, implants and other consumables and incidentals provided to patients during a medical procedure/treatment to value added tax as ‘sale of goods’. On the question whether a package for treatment (such as knee replacement surgery) would be given different treatment for the reason that it involves placing of stents, implants etc., the court observed that the fact that a hospital may charge money for individual stents etc., whether as part of a package or separately is entirely irrelevant. A contract of medical service cannot be said to be a contract for sale of a stent, or valve or of medicines to be used in a medical/surgical procedure, which could be brought within the purview of value added tax. The essential element of such a contract is the procedure of knee replacement, hip replacement, angioplasty, which as an intrinsic and integral part involves placing an implant whether in the knee, hip or a heart etc. The only choice available to the patient is the nature of the implant, namely, its quality but such a procedure is admittedly, a medical procedure and a service that cannot be completed without an implant/drugs and medicines as an integral part of the procedure. Hence, it was held by the court that the contracts of medical service could not be said to be contracts for sale of medicines/drugs, stents, implants etc. as the dominant intention in these contracts is to avail the medical treatment services.
Recently, similar view has been taken by the Kerala AAR in the case of Starcare Hospital Kozhikode (2019-VIL-134-AAR) wherein it was held that supply of medicines, consumables, surgical items etc. for providing healthcare services to in-patients for diagnosis or treatment, constitute a ‘Composite Supply’ of healthcare services and hence, exempt from GST. The same is in line with earlier AARs in the matter of KIMS Healthcare Management (2018-VIL-246-AAR) and Erankulam Medical Centre (2018-VIL-179-AAR).
Therefore, in case of IPD patients, since no GST is paid/payable on the composite supply of healthcare services, a question may arise as to whether the input GST on their procurements shall form part of their cost and therefore, the part of overall ceiling price/retail price? Whether the GST needs to be recouped from the prescribed trade margins?
In furtherance of above, for instance, in case a drug costs Rs 20,000+GST, the ceiling price is Rs 22,000 and the rate of GST is 12 per cent or more, the amount recovered by the hospital would be even lower than its procurement cost as shown in the table below.
With a view to avoid hit of GST on the trade margins, are hospitals entitled to treat the service portion of their supply as supply of healthcare services and the supply of drugs/formulations and implants as separate supply of goods to pay and collect GST above the ceiling price, as per the above orders? Hospitals should carefully analyse these orders to fix their margins. Further, the hospitals may need to strategise their operations so that the input GST does not hit their pricing.