Considering medical or health-related services as essential
services, the Government in the past consciously kept them out of the ambit of
service tax. India being a developing economy, it is hardly able to provide any
social security to its soaring population. A small class of this huge mass is
covered under health insurance schemes floated by various insurance companies.
In the current fiscal, however, the Government decided to levy service tax on
limited health-related preventive care and treatment services provided by
hospitals, nursing homes and multi-speciality clinics under specified conditions
as set out vide the Finance Act, 2010 and notified to come into effect from July
01, 2010.
2. Statutory provisions of health check-up and treatment
services are provided below :
S. 65(105)(zzzzo) of the Finance Act, 1994 (the Act) :
“Taxable service means any service provided or to be
provided by any hospital, nursing home or multi-specialty clinic, —
(i) to an employee of any business entity, in relation to
health check-up or preventive care, where the payment for such check-up or
preventive care is made by such business entity directly to such hospital,
nursing home or multi-specialty clinic; or
(ii) to a person covered by health insurance scheme, for
any health check-up or treatment, where the payment for such health check-up
or treatment is made by the insurance company directly to such hospital,
nursing home or multi-specialty clinic.
3. Scope and coverage :
3.1 Perusal of the above provisions indicates that the
following essential ingredients are required for being covered within the
purview of the above category of service :
Who are service providers ?
The service should be provided by a hospital, a nursing
home or a multi-specialty clinic.
Who are service receivers ?
The service receiver should be; either
–
any employee of a business entity; or
–
a person covered by a health insurance scheme.
What essentially constitutes a service covered under the law ?
The service should essentially relate to :
–
Health check-up or preventive care for an employee of a business entity;
–
Health check-up or treatment in case of any person covered by a health
insurance scheme.
When the payment is made directly :
–
either by a business entity; or
–
by an insurance company to the hospital, nursing home or multi-specialty
clinic, as the case may be, the service is considered taxable.
3.2 Before analysing further, we consider below the relevant
extract of Ministry’s Circular letter DOF No. 334/1/2010-TRU (Annexure A), dated
26-2-2010 issued immediately after presentation of the Finance Bill, 2010.
“2.2 A large number of health insurance schemes are being
offered by the insurance companies, under which charges for hospitalisation,
surgery, post-surgical nursing, etc. are generally paid by the insurance
company. Such insurance policies, which fall under the category of general
insurance service, are already taxable. Under general insurance service, an
insurance company is a service provider to its clients. Under the proposed new
service, tax is also being imposed on the medical charges paid by the insurance
companies to the hospitals on behalf of a business entity for its employees. As
such, the insurance company would be the service receiver and the tax paid by
the hospital would be available to the insurance companies as credit.
2.3 The tax on the above-mentioned health
services would be payable only if and to the extent the payment for such medical
check-up or treatment, etc. is made directly by the business entity or the
insurance company to the hospital or medical establishment. Any additional
amount paid by the individual (i.e., the employee or the insured, as the case
may be) to the hospital would not be subject to service tax. This is to ensure
that an individual is not required to pay a tax for which he cannot take
credit.” (emphasis supplied).
The above clearly indicates that when the payment by a business entity or an insurance company is made directly to any hospital, nursing home or multi-speciality clinic (hereinafter referred to as ‘hospitals’ for all the three) in relation to health check-up or treatment, etc., service tax is attracted. However the words, ‘hospital’, ‘nursing home’ and ‘multi- speciality clinic’ are not defined under the service tax provisions. Therefore, these terms have to be understood as per their common parlance meanings. Hospitals would include all kinds of hospitals whether Central or State Government, private or charitable. Hospitals are generally institutions having a large set-up with many ‘in-house’ curative and diagnostic facilities. Nursing homes as opposed to hospitals are smaller versions of hospitals providing basic and skilled nursing care under doctor’s supervision, but having a limited treatment facility. They are more often than not used for those patients requiring long-term facility where hospitalisation is not required but health care at home is difficult. Multi-speciality clinics are generally those establishments, which are jointly managed by several specialists using common infrastructure facilities.
3.3 The next important aspect in the statutory provisions is recipients of services. The employees of any business entity are covered. The term ‘business entity’ is defined by S. 65(19b) of the Act as ‘business entity includes an association of persons, body of individuals, company or firm, but does not include an individual’.
Thus, service tax liability for hospitals arises when the payment is received by them from any business entity directly for its employee/s. Similarly, the service tax is also payable by the hospitals when the payment is made directly by the insurance company to such hospitals for health check-up or medical treatment given to persons covered under the health insurance schemes. These schemes in common parlance are known as mediclaim policies.
3.4 Health check-up, preventive care and medical treatment services:
- Health check-up or preventive care for employees of business entity:
Health check-up would generally cover periodic or annual physical examination or tests of various organs including diagnostic tests under health check- up schemes. The other term used in sub-clause (i) of the definition is ‘preventive care’. This may also either interchangeably be used for the health check-up or it may mean as little extension of health check-up and would cover measures to prevent a disease from occurring as against curing a disease. Thus preventive care would certainly pre-suppose undergoing physical examination and/ or diagnostic tests and post- diagnostic measures or programmes, but payment made by a business entity for any curative treatment would not be covered for the levy of service tax.
- Health check-up or treatment provided to persons covered under health insurance schemes:
When an insurance company pays directly for a health cover of a policy holder (which in common parlance is known as “cashless policy”) whether for health check-up or for any medical treatment, service tax is payable by the hospitals. Instead, when a person insured at the threshold pays directly to the hospital for the health check-up or medical treatment and subsequently claims reimbursement, no service tax is required to be charged or paid by the hospital. Further, under mediclaim policies of this kind, when various medical treatments also get covered, service tax would be attracted.
Exemptions:
No specific exemption is provided to any person or any service as the scope of the category of service itself is limited to certain services and when paid directly by any business entity or insurance company. However, general exemptions applicable to all other taxable services apply to this service as well. These exemptions are services provided to the United Nation or other international organisations under Notification No. 16/2002-ST, dated 2-8-2002, services provided to a developer or unit of Special Economic Zone under Notification No. 9/2009-ST, dated 3-3- 2009 and services provided to foreign diplomatic mission or diplomat agents or career consular officials, etc. under Notifications No. 33/2007 -ST and No. 34/2007-ST, both dated 23-5-2007 as per terms and conditions mentioned under respective notifications.
Some issues:
5.1 Company A, a manufacturing company as per its policy provides facility of health check -up as well as various medical/surgical treatments to its employees at empanelled hospitals. The treatments include bypass surgery, hernia, various orthopedic surgeries, angioplasty, ENT surgeries, etc. The Company’s employee, Mr. X was hospitalised and had to undergo a bypass surgery in October 2010. The Company paid directly to the hospital for his hospitalisation, surgery and related other expenses including diagnostic tests. Whether the hospital is obliged to pay service tax on the above and therefore collect it in its invoice on Company A?
5.1A Vis-à-vis employees of a ‘business entity’, only the services in relation to health check-up or preventive care are specifically covered. When an employee is admitted to a hospital for a bypass surgery, it would mean a medical and surgical treatment to remove and cure blockages in the arteries. This service is not covered in sub-clause of S. 65(105)(zzzzo). The first sub-clause is specific to the employees of a business entity, wherein only services in relation to health check-up or preventive care are covered. Therefore the hospital is not liable to pay service tax in the invoice raised on Company A.
5.2 Many insurance companies appoint Third Party Administrators (TPAs) for facilitating payment to hospitals on their behalf. Often the hospitals therefore raise bills on such TPAs. Whether service tax is to be levied by the hospitals?
TPAs act on behalf of the insurance companies. Their services are outsourced by the insurance companies for administration, management and processing of hospital bills. Even if the invoices are issued by hospitals on such TPAs, generally the payment is made by the insurance company as the person is insured by the insurance company. The payment in terms of the legal provisions discussed above would be treated as made by the insurance companies and subject to fulfilment of other requirements discussed above would be liable for service tax. This comment is however subject to specific terms and conditions of the agreement between an insurance company and a TPA.
5.3 Many corporate entities like airlines, shipping companies or other multinational companies while recruiting new employees require them to undergo medical examination/fitness tests and pay directly to the hospital for the same. Whether this would also attract service tax?
5.3A Technically, the persons, prior to their being recruited, are not employees of the organisation and therefore they are not covered by the insurance scheme meant for the employees. The definition as discussed above specifically covers employees only and therefore medical examination for persons other than employees would not attract service tax. However, unless the concerned corporate notifies the hospital as to the tests/ examination conducted for non-employees, the hospital would not be able to distinguish since they receive payment directly from corporates against their invoices raised on them; they would assume their service tax liability on such invoices as well.
5.4 Whether pathology laboratories conducting blood tests would also be considered part of health check-up and therefore liable for service tax?
5.4A There is a taxing entry ‘technical testing and analysis’ notified in S. 65(106) of the Act. Under this clause, an explanation is provided whereby testing and analysis for determination of nature of diseased condition, identification of disease, prevention of any disease or disorder on human being or animals is specifically excluded. When specific exclusion is provided under one taxing entry, it would not be under another taxing entry. Further, the overall physical check-up undertaken under a mediclaim policy may include pathological tests conducted at a hospital. But the definition above in S. 65(105) (zzzzo) specifically includes only three kinds of service providers viz. hospitals, nursing homes and multi-speciality clinics, but does not include pathological laboratories.
5.5 In most cases of claims submitted by a person under health insurance/mediclaim policies for medical or surgical treatments, it is observed that substantial amount in a hospital invoice includes cost towards medicines, implants or stent, etc. and other consumables. Whether service tax is chargeable on the entire amount of invoice including the value of supply of goods also?
5.5A As it is known, Notification No. 12/2003-ST, dated 20-6-2003 in unambiguous terms exempts value of goods and material sold or supplied during the course of providing services. Many rulings have been pronounced by judicial forum, whereby the principle is upheld that supply of goods (which is chargeable to VAT) cannot be subject to service tax, as service tax is levied on the value of taxable services. However, as per requirement of the above Notification, whether value of ‘goods’ supplied is indicated in the invoice or whether any other documentary evidence thereof is available, etc. Therefore, the liability of service tax would have to be determined on a case-to-case basis.
