VAT - Taxing Healthcare

Taxing Healthcare Sector - An Unhealthy Treatment! 


SEPTEMBER 24, 2013

By Debasish Bandyopadhyay

THIS article is to discuss and examine the taxability of transactions relating to health care activities undertaken by the clinical establishments/hospitals/nursing homes. The taxability of the above activity has been a matter of controversy on both the central as well as states' taxes fronts. The issue needs urgent attention, especially at the backdrop of recent initiatives and momentum gained on revenue mobilization by certain state governments by trying to tax healthcare activity in hospitals/nursing homes resulting in panic and uncertainty over the trajectory of the Indian healthcare sector. The fundamental nature of such transaction has given rise to ambiguity for the purpose of levying taxes.

Nature of transaction

It is imperative to evaluate the nature of any transaction for levy of taxes in the light of relevant central as well as states' taxation statutes. In order to attract a levy, it is essential to determine that the subject transaction falls within the definition of ‘goods' under the State VAT laws or 'service' as defined in section 65B (44) of the Finance Act, 1994. Now, let us elaborate the activities undertaken by the hospitals/nursing homes such as medical treatment render by the doctors therein, administering drugs, medicines, inserting implants, dental prosthetics, devices, artificial limbs in patients during diagnostic tests and treatments including package treatments, the supply of diet and food to indoor patients, medicines and consumables sold to patients through the hospital/nursing home pharmacies (not in the course of treatment), cafeteria sales, scrap sales etc.

It is pertinent to note that the above activities are required to be separately analysed to determine whether such transaction would constitute ‘sale' as generally understood or ‘deemed sale' as defined in Article 366(29A) of the Constitution of India & State Commercial Tax Laws or ‘service' as defined under the Finance Act, 1994. The fundamental question to be examined in this matter is nature of the transaction undertaken by the hospital/nursing home. Is it a sale or is it a service or is it both? If it is a sale then the States are legislatively competent to levy sales tax. If it is a service then the Central Government alone can levy service tax. And if the nature of the transaction partakes of the character of sale and service, then the arguable question would be whether both legislative authorities could levy their separate taxes together or only one of them.

Levy of tax on goods

The definition of ‘Goods' under different State VAT laws has been broadly adopted from section 2(7) of the Sale of Goods Act, 1930 reads as under:

“Goods" means every kind of movable property other than actionable claims and money; and includes electricity, water, gas, stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

In the context of its use in the provisions of imposing tax on goods on the event of their sales or thing/activity on which the tax is imposed, the medicines and consumables sold to patients through pharmacies (not in the course of treatment), cafeteria sales, scrap sales etc. may fit into the definition of sale or purchase of goods as interpreted under the VAT laws of different states.

Taxability on administration of medicines, use of consumables and implants, the supply of diets and foods to indoor patients in the course of treatment including package treatments being composite transaction, are to be tested on the basis of deeming provision of ‘deemed sale' under VAT laws of different states and constitutional provisions mandated under Article 366(29A).

Can the above activity of composite transaction being an inseparable part of the treatment constitutes ‘deemed sale' as defined in Article 366(29A) of the Constitution to be subjected to sales tax under state commercial tax laws? Does the Constitution of India permit the splitting up of such composite transaction?

Constitutional provision

For the sake of present discussion, Article 366(29A) of the Constitution is extracted below –

"tax on the sale or purchase of goods" includes-

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;]

Reading into the above provision thoroughly together with the observation made by the Supreme Court in the matter of Bharat Sanchar Nigam Ltd. & Anr., v. Union of India & Ors., [ 2006-TIOL-15-SC-CT-LB ] it can be concluded that the Constitution of India does not permit the splitting up of certain composite transactions even after insertion of Article 366(29A). It has been observed that sales tax can be levied on transactions provided that the necessary concomitants of a sale are present and a sale is distinctly discernible in the transaction. In the context of the inpatient treatment, the dominant intention in administering medicines or consumables or implants is treatment of disease and not the supply/sale of medicines, consumables etc. or as the case may be. Therefore, the activity of composite transaction carried out by the hospitals/nursing homes in the course of inpatient treatment under no circumstances should amount to ‘deemed sale' to levy sales tax by the States Governments.

Levy of tax on service

Earlier, as part of the Budget proposal for 2011-12, levy of service tax was introduced on healthcare sector on high-end hospitals and certain diagnostic services. However, bowing to demand from all quarters, the said levy had been withdrawn providing much-needed relief to the common man. Therefore, the healthcare activity has already been recognized as a ‘service' by the central government.

Under the new service tax regime, healthcare services by a clinical establishment, an authorised medical practitioner or para-medics; has been included into negative list vide Notification No. 25/2012 -Service Tax dt. 20 th June, 2012. There is a clear exemption from service tax on any kind of healthcare activity undertaken by the hospitals/nursing homes. Thus, there is no need to analyze the taxability in the context of “declared services”, since such transaction has already been identified and recognized as “exempted service” for the purpose of levy of service tax w.e.f. 1 st July, 2012.

Position under different State VAT Laws

It may be pointed out that after the implementation of VAT across the country, most of the state government had gone back on its commitment of a uniform rate of VAT and related treatments. Similarly, there is no uniformity and/or clarity across the states towards chargeability of VAT on healthcare and its related activities. Let's now visit few states to understand the prevailing ground situation with respect to modus operandi adopted by the local government on taxing healthcare and related activities thereof.


In pursuance to the judgement of Apex court in the matter of Bharat Sanchar Nigam Ltd. & Anr., v. Union of India & Ors., Maharashtra Government vide an internal Circular No. 7A of 2008 Dt.13.3.2008 has clarified that administering medicines or consumables or implants would not amount to ‘deemed sale' for the purposes of the Explanation under the relevant provision of MVAT Act. Accordingly, hospitals are not liable to pay tax on supply of medicines administered to the in-patients in the course of treatment and to the extent the hospitals have billed the patients for such supply. While hospitals are liable to pay tax on other sales such as cafeteria sales, scrap sales, sales from the hospital pharmacy shop tooutdoor patients (not in the course of treatment).


In the state of Kerala, the matter of taxing health care sector has been a point of disputes for quite some time. Finally, the Kerala High Court has held that medicines and consumables sold to patients through the hospital pharmacies would be taxable under the Kerala Value Added Tax (KVAT) Act. The High Court in the matter of Sanjos Parish Hospital V. Commercial Tax Officer, Thrissur and Others [2012] 55 VST 208 (Ker) has held as:

“In so far as the finding regarding hospital services or example that is given by the apex court are concerned, the court has only laid down a principle and said that if in the process of treatment a pill is given to a patient, such a transaction cannot be treated as a sale. That example given by the apex court cannot be taken to mean that it was laying down a principle that in all circumstances, every transaction that takes place in a hospital is a service and is outside the taxation law. This is all the more so in today's context where hospitals are being established by public limited companies which are incorporated with profit-motive. Therefore, if in a hospital, medicines and other consumables are sold to a patient and bills are raised, such transaction cannot be outside the KVAT Act and taking refuge under the example given by the apex court to explain the meaning and content of article 366(29A) of the Constitution, such hospitals cannot avoid statutory liabilities”

However, as part of incentive to hospitals and attaining clarity across the sector, Kerala Government vide Circular No. 4/2013 Dt.02-04-2013 has clarified that sale of laboratory store items and consumables to patients by certain hospitals (run by charitable institutions enjoying exemption under the Income Tax Act and purchase medicines from compounded dealers) will be exempt from VAT for the period prior to 1 st April, 2013, if they obtain registration before 30th June, 2013.


Delhi government, earlier this year through an advertisement had warned the hospitals and nursing homes to get registration for paying VAT to avoid action. This created panic and confusion among hospitals and nursing homes in Delhi. Subsequently, on being represented before the authority concerned by the stakeholders, the Government has clarified that there has been no change in VAT laws or rates and the matter has been kept on hold for the time being to decide on the further course of action. Thus, reading into the clarification made by the Delhi Government it seems that there is no VAT on healthcare activities as of now.

West Bengal:

The West Bengal government's efforts to shore up revenue collection already received a setback with the Calcutta High Court holding the entry tax introduced in the 2012-2013 budget as unconstitutional. Now the government in its desperate attempt to rack up revenue has set its eye on healthcare sector, among other areas. The hospitals/nursing homes in the state are receiving communication for getting registered with the commercial tax authorities towards paying applicable VAT. In spite of having no clarity on the basis of taxing medical care activities under the current VAT law, pressure tactic is being exercised by the commercial tax authorities resulting into shock and confusion over the healthcare sector across the state. It's unfortunate that where thousands of people are dying due to lack of basic medical care, government is taking such an aggressive strategy which ultimately may create an additional burden on the patients. In such a situation, state government should chalk out a transaction based clear guideline on the nature, structure and basis of taxing healthcare related activities and clarified through an appropriate circular for the benefit of all stakeholders.


It would then seem that there is no uniformity and clarity on the issue of taxing healthcare activities across the country. The Indian healthcare system is in a dilapidated state. In most parts of the country, formal primary care is almost non-existent. The costs seem to rise everyday which makes it unaffordable for a large chunk of the population. In such a situation, considering economic and social well-being of not just the poor but also middle class of India at the backdrop of on-going high inflation, activities relating to healthcare and education sectors should be exempted from all taxes in entirety. Moreover, the government should realize that substantial improvement in any sector can only be achieved with determined effort and an appropriately designed tax policy. Therefore, it is high time before the implementation of GST, Empowered Committee should take up the issue and design a uniform and clear policy on taxing healthcare activities in the country for the benefit of public at large.