Memorandum submitted before the Finance Minister

Sub: Exemption for health-care institutions from VAT – regarding

Kindly consider -- A hospital service is not susceptible to be split into treatment as service and giving medicines as sales.

We hereby invite your kind attention to the matter in Kerala General Sales Tax Act (K.G.S.T. Act) enacted as 15 of 1963. At the time of enactment or after two decades, did neither the State Government nor the officials under the Act define Hospitals as a dealer under the Act? In the year 1998 some of the officials under the Act started to define and consider Hospitals as business centres as well as shops and issued notices to Hospitals to register and bring them under the purview of the Act. In the light of the said event, we were forced to approach the Hon’ble Court for justice, filed cases in the matter, and finally filed Special Leave Petition No. 2118/06 before the Hon’ble Supreme Court. The Hon’ble Supreme Court was pleased to “Grant Leave” in the said matter. By virtue of the said order the Sales Tax Officers and the department were constrained to keep the matter pending and desist from all the proceedings against Hospitals under the Act.
Meanwhile the Central Government as well as State Government enacted Kerala Value Added Tax 2003 and Rules 2005. Subsequently the officers under the K.V.A.T. Act initiated proceedings under the Act to cover Hospitals under the ambit of the new Act. Aggrieved, we again approached the Hon’ble Courts and finally filed another Special Leave Petition No. 13703/2009 and the Hon’ble Supreme Court observed that the question of Law raised by the petitioner was similar to the previous S.L.P. No. 2118/06 in the matter of K.G.S.T., which was pending before the Court and was pleased to issue notice to the Commercial Tax Department and the State Government. In the light of the same, all the proceedings under the Act were kept in abeyance by the Commercial Tax Department. However, we hereby furnish the following decisions of the Hon’ble Supreme Court of India in this matter for your kind perusal.

A Constitution Bench of the Hon’ble Supreme Court in the case of Safdarjung  Hospital vs. Kuldip Singh Sethi (1970) I SCC 735 had observed that a hospital is not embarked on an economic activity, which can be analogous to trade or business. Though the said case was overruled subsequently on the aspect of definition of industry, a six Judge Bench of the Hon’ble Supreme Court in this case has observed that the economic activity carried on by a Hospital cannot be described as a business.

The dispensing/supply of medicines to our patients is part of the treatment and that supply of medicine though conceded, is only incidental and essentially the hospital is rendering medical services with professionals namely doctors and nurses who are experienced in the medical field. We are referring to the decisions of the Supreme Court in state of Tamil Nadu vs. Board of Trustees of the Port of Madras (1999) 114 STC 520) and in Northern India Caterers (India) Ltd. LT, Government of Delhi (1978) 42 STC 386. Relying on the above two decisions the petitioners contended that the main activity being the rendering of medical services, the supply of medicine is only incidental and it does not constitute “sale” to make the petitioners liable as a “dealer” under the Act. However, there is no dispute that supply of medicine is an integral part of rendering services and it is significant in terms of cost to the patients and charged separately. Therefore, the first question to be answered is whether the supply of medicine is only an incidental transaction or whether it is as important as any other service such as rendering medical service or other services in the course of treatment. Except probably in surgical treatment, nobody can have a doubt that medicine accounts for the main cost along with consultancy charges for the doctor, expenditure in diagnosis, etc. Therefore, from common knowledge it is clear that medicine is as important, if not more in terms of value and purpose as anything else in the medical treatment. Moreover, the supply of medicine is not only incidental but also the main and integral part of the treatment and it is as important as medical consultation or other services in the hospital. Therefore, dispensing of medicine in the course of medical treatment either to inpatients or to outpatients has to be taken as one of the integral parts of the main activities in a hospital or in a clinic.

In 1999 (4) SCC 630 Hon’ble Supreme Court of India held that if the main activity is not ‘business’ then the connected, incidental or ancillary activities of sales would not normally amount to ‘business’ unless an independent intention to conduct ‘business’ in these connected, incidental or ancillary activities is established by the Revenue Department. It will then be necessary to  find out whether the transaction, which are connected, incidental or ancillary are only infinitesimal or small part of the main activities. In other words, the presumption will be that these connected, incidental or ancillary activities of sales is not ‘business’ and the onus of proof of an independent intention to do ‘business’ in these connected, incidental or ancillary activities will rest on the Department.

It is relevant to point out that after the 46th Amendment of the Constitution, amending Article 366 (29A) of the Constitution of India, the principle enunciated in Ganon Dunkerly Case - AIR 1958 SC 560, was modified by bringing in a legal fiction whereby certain specific composite contracts like, works contracts [clause b of Art. 366 (29A)], hire purchase contracts [clause c of Art. 366 (29A)], and catering contracts [clause e of Art. 366 (29A)], were regarded, by that fiction, as divisible contracts, where the sale element could be isolated and be subjected to sale tax. Of all the different kinds of composite transactions, the drafters of the 46th amendment, chose only three specific situations to be brought within the purview of deemed sale and none else. Of the three, the first and third, i.e., works contracts and catering contracts involve a kind of service and sales at the same time. Apart from these two cases where splitting up of the service and sale has been constitutionally permitted under Article 366 (29A), no other service has been permitted to be split. A hospital service is not susceptible to be split into treatment as service and giving medicines as sales.

Giving medicines to patients is not sales as generally believed, but is dispensing without taking any additional profit. Most of us dispense medicines charging less than the MRP recorded. If we are not to do that from a hospital or clinic, the patients will suffer, as the Drug stores do not function 24 hours a day. The Drugs Act, 1940 and Rules, 1945 do permit Hospitals to store drugs without a Drug License as applicable to Drug Stores. In fact, doctors and their institutions are exempted from Chapter IV of the Drugs Act, 1940 as per Rules 123, Schedule K Item 5. (Also see Rule 65 of Drug Rules, 1945 copied hereunder:-

65. Condition of licences. __

(5)(1) Subject to the other provisions of these Rules the supply of a drug by wholesale shall be made against a cash or credit memo bearing the name and address of the licensee and his licence number under the Drugs and Cosmetics Act in which the following particulars shall be entered __

(a) the date of sale,

(b) the name, address of the licensee to whom sold and his sale licence number. In case of sale to an authority purchasing on behalf of Government, or to a hospital, medical, educational or research institution or to a Registered Medical Practitioner for the purpose of supply to his patients the name and address of the authority, institution or the Registered Medical Practitioner as the case may be,

(c) the name of the drug, the quantity and the batch number,

(d) the name of the manufacturer,

(e) the signature of the competent person under whose supervision the sale was effected.)

The above Rule 65 (5) (1) (b) clearly says that drugs must be given to hospitals and doctors for the purpose of supply to patients.

Including doctors and hospitals under VAT is violation of the Drugs Act and Rules cited.

Ignoring the above facts and circumstances the officials under the K.V.A.T. Act initiated proceedings by issuing notices to cover and register Hospitals under the Act. By the end of 2010, the Commercial Tax Officials imposed huge amount of penalties u/s. 67 (1) of the K.V.A.T. Act for the non-registration of hospitals as dealers under the Act and directing them to take registration under the Act. In their reply, Hospitals have stated that they are only providing treatment by dispensing medicines and treatment consumables to the sick and destitute and not doing any business or business activities. Despite the same, Commercial Taxes Officers imposed huge amounts of penalties u/s. 67 (1) of the Act with threats of revenue recovery proceedings. In the light of the above, some of the Hospitals were forced to apply for registration under the Act without any rethinking and consultations. At the same time, we have succeeded to file in time the Writ Petitions before the Hon’ble High Court of Kerala and the Hon’ble Court is pleased to stay the coercive actions of the department and the proceedings compelling Hospitals to take registration under the Act.

We are thankful to the Taxes (B) Department for the letter No. 1097/B3/2012/TD dated 12.09.2012  exempting private hospitals up to March 2012, in response to our representation dated 21.12.2011 before you.

In the light of the above facts submitted, we humbly request you to exempt all health-care institutions from the purview of KVAT Act and help us reduce the cost of healthcare services by private sector hospitals to the poor patients in Kerala.

We are aware of your initiatives to help poor patients survive the ever-escalating cost of medical treatment and we are always ready to cooperate with them. However, widening the tax net to include healthcare institutions will only defeat your vision.

We humbly request you to take the lead in India as a visionary to give up all state taxes for medicines and bring down cost of treatment affordable to the teeming millions here.

Thanking you,


Yours sincerely,


Dr. M. A. Koya,                                                                                   Dr. O. Baby

President Kerala                                                                                  President