Rohan Muralidharan, Principal Associate and Sahana Rajkumar, Principal Associate, Lakshmikumaran and Sridharan Attorneys highlights that the journey of GST has been a series of ebbs and flows with the government granting certain concessions and/or imposing restrictions from time to time. It would not be incorrect to say that the government has been pro-active in its approach and has intervened wherever it felt it was necessary to do so in the larger public interest. The 47th GST Council Meeting which was convened just before the completion of 5 years of GST was historic in terms of the changes it has proposed to make in the GST regime
This article will focus on one innocuous recommendation which on the face of it looks straightforward in terms of what it wants to achieve but there is more to this proposal than what meets the eye.
The Press Release dated 29.06.2022 issued by the GST Council inter alia makes the following recommendation: –
Room rent (excluding ICU) exceeding Rs 5000 per day per patient charged by a hospital shall be taxed to the extent of amount charged for the room at 5 per cent without ITC.
This recommendation raises the question as to whether room rent charged by a hospital was otherwise not liable to tax hitherto. In this regard, CBIC, way back in 2018, vide Circular No. 27/01/2018-GST dated 04.01.2018 had clarified that “Room rent in hospitals is exempt”. While the Circular did not specify under which exemption entry the said room rental services was exempt, if one were to take a guess, the exemption may be available under S. No. 77 of Notification No. 09/2017 – Integrated Tax (Rate) dated 28.06.2017 which exempts “health care services by a clinical establishment, an authorised medical practitioner or para-medics”.
Notwithstanding the exact entry under which the said service was exempt, since the CBIC had clarified that room rent in hospitals will be exempt from GST, there was no major quarrel on this point.
With this background in mind, we now proceed to deal with the current recommendation of the GST Council with respect to charging GST@5 per cent on rooms provided on rent by hospitals. While we all await the actual text through which the rate entry is going to be introduced, a few preliminary questions may arise on how the recommendations will be brought into force.
Whether ‘rooms’ are different from ‘beds’?
The recommendation only provides for a 5 per cent rate for renting of rooms by a hospital. In a hospital, certain rooms may be twin-sharing or triple-sharing with the hospital recovering the cost of each bed from the patients separately. In such circumstances, if the individual bed charges are more that Rs 5,000 per day, a question may arise as to whether such charges will also be brought to tax. If the rate entry proposed to be introduced only seeks to tax ‘Room Rent’, it would also have to be seen if an argument can be made out to state that the same would not apply to recoveries made towards ‘beds’ provided by a hospital in a common room/ward.
Alternatively, if the rental charge of beds individually is less than Rs 5,000, whereas the sum total of all the beds put together in a room is more than Rs 5,000, a question may arise on whether the hospital will be liable to pay tax on such renting services.
Whether tax is payable on room rent only in excess of Rs 5,000?
Another interesting issue which emerges is whether GST will be payable only for the room rent charged in excess of Rs 5,000/-. For example: – if rental charges for a room in a hospital is Rs 7,500; then a question will arise as to whether GST will be applicable on the ‘amount exceeding Rs 5,000’ i.e. Rs 2,500 or on the ‘total amount charged for the room’ i.e. Rs 7,500?
A similar dispute arose in the context of exemption available to services provided by resident welfare association to its own members wherein maintenance charges upto Rs 7,500 were exempt. While the Single Judge Bench of the Hon’ble Madras High Court held that the charges only in excess of Rs 7,500 will be taxable[1]; the Division Bench on Appeal has stayed the order of the Single Judge and the matter is pending final disposal before the Division Bench.
Composite Supply of healthcare service?
While it is not in dispute that over and above other charges, hospitals generally charge a patient for room rent separately. A doubt arises as to whether such service by way of renting of rooms is part and parcel of the health-care services provided by the hospital and whether, the same can be legally vivisected and brought to tax separately.
In this regard, reference is made to the concept of Composite Supply[2] which has been defined by the GST Act to mean a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or 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.
Principal supply[3] has been defined to mean supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
Further, Section 8 of the CGST Act, 2017 provides that a composite supply comprising of two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply. In other words, the tax treatment prescribed for the principal supply would be applicable to the entire bundle of supplies.
On application of the above principles to the present case, it can be said that when a patient approaches a hospital for a certain treatment, their primary intention is to procure healthcare services such as diagnosis, treatment and recovery; and it is only for this purpose, rooms are rented by patients. A patient will never independently rent a room in a hospital for leisure. Thus, an argument can be made that room rent paid to hospitals cannot be brought to tax independently as the same is ancillary to the healthcare service which is the principal supply agreed to be rendered by the hospital in the present case.
In other words, it is possible to state that so long as healthcare services continue to be exempted from payment of GST, an independent treatment to room rental services by hospitals may not be legally appropriate.
Input Tax Credit (ITC) on room rent services – Eligible?
It will also be interesting to witness the service code under which the said service will be brought to tax i.e., whether the service will be classified as ‘health service’ in terms of ‘Heading 9993’ or Accommodation Service under ‘Heading 9963’ or as ‘Real Estate Service’ under ‘Heading 9972’.
This aspect may be crucial to determine the ITC eligibility in the hands of recipient in general and insurance companies in specific.
It is relevant to note that Section 17(5)(b) inter alia disallows the availment of credit of GST paid on supply of ‘health services’ in the hands of the recipient of services. The relevance of this restriction to the alleged taxable room rent services requires discussion. We proceed to consider an illustration for ease of understanding.
Let us say a patient is covered by a health insurance policy. The insurance company (insurer) has a tie-up with a hospital by virtue of which the hospital will directly deal with the insurer for recovery of the charges towards the services provided to the patients. The insurer will settle the claim directly to the hospitals. The invoice for the services provided by the hospital will also be raised on the insurer. In such circumstances, a question may arise as to whether the insurer will be entitled to take ITC of the GST charged by the hospital for renting of rooms?
The answer to this question will be determined based on whether the room rent service qualifies as health service. Prima facie, room rent services if brought to tax separately may not strictly fall within the ambit of ‘health service’. Nonetheless, a final view can be taken only when the notifications prescribing the rates are introduced.
For the sake of clarity, it may be noted that when the above-mentioned recommendation of the GST Council states that 5 per cent GST is proposed to be charged on room rent and the same would apply without ITC, ostensibly the ITC sought to be denied in terms of the recommendation is in the hands of the hospital providing the alleged service of renting of rooms and not per se in the hands of the recipient of such services.
Conclusion
The objective of this article is to raise certain pertinent questions to ensure that the same are adequately addressed by the government before the rate entries are introduced. At the same time, it is incumbent upon the industry and trade to seek suitable clarifications by way representations.
References:
[1] Greenwood Owners Association v. UOI [2021 (7) TMI 591 – MADRAS HIGH COURT]
[2] Section 2(30) of the CGST Act, 2017
[3] Section 2(90) of the CGST Act, 2017
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