Tax on Hospitals


VAT authorities in Maharashtra are taking view that the medicines used in treatment of patients admitted in hospital (in-patients or ‘in house-patients’) are liable to Sales Tax under MVAT Act, 2002. What is the correct position?


In hospital, when the patient is admitted, he is given medical treatment. The treatment includes services of doctors as well as giving medicines as may be required. In this transparent era, normally hospitals show charges towards medicines separately and other charges like bed charges, room charges etc., separately. In case of Saifee Hospital, a view was taken that the receipts toward medicines are liable to tax under MVAT Act. Similarly estimations were made towards food supply out of composite charges for room. There were also receipts towards special beds and mattresses. These charges were also held to be liable to VAT under ‘Transfer of right to use goods’.

Against the above first appeal order, second appeal was filed before Hon. M.S.T. Tribunal. Hon. Tribunal has delivered judgment in case of Saifee Hospital (Second Appeal No.190 of 2016 dated 8-12-2017).

Issues raised by first appeal order

Hon. Tribunal has noted that following issues are raised by the First Appellate Authority and after giving hearing held them as liable to tax under MVAT Act.

1) The supply of drugs and medicines and other surgical goods effected by pharmacy/drugstore to indoor admitted patients, is sale, liable to VAT.

2) Provision of food in hospital to admitted patients received in the composite charges received from patients for the bed charges is a sale of food and liable to VAT.

3) Supply of dental materials/implants by dental Department is a sale liable to VAT.

4) Hire charges for mattresses are liable to VAT.

5) Provisions of goods like special beds and equipments where hire charges have been received from patients is deemed sale in the nature of transfer of right to use any goods.

Hon. Tribunal noted the submissions made by the appellant in detail. Appellant made submissions on following focus issues:

a) The Commissioner of Sales Tax, vide letter dated 26-12-2007, has clearly stated that the dominant intention in administering medicines to in-patients is treatment of diseases and not supply/sale of medicines, consumables or implants.

b) The Sales Tax Department has further issued Circular No. 7A of 2008 dated 13-3-2008, wherein also, following BSNL (145 STC 91)(SC), same position is reiterated.

c) Even if pharmacy from where medicines are supplied is owned by hospital, so far as supply of medicines for treatment to
in-patients is concerned it is not sale. Sale by pharmacy over the counter to outpatients or general public is considered as sale under MVAT Act and due VAT has been discharged.

d) In particular, following judgments vary on same issue were cited:

(i) Dr. Hemendra Surana (90 STC 251) wherein it is held that taking x-ray and giving report is not a works contract activity.

(ii) Bharat Sanchar Nigam Ltd. (145 STC 91)(SC), where it is observed that medicines provided by doctor/hospital is not sale.

(iii) International Hospital Pvt. Ltd. (Writ Petition No. 68 of 2014 decided on 6-2-2014) in which use of stents for treatment of patient is held as not amounting to sale.

(iv) Tata Main Hospital (2208 NTN Vol-36 149) and Fortis Healthcare (CWP 1922 to 1924 of 2012 dated 23-1-2015).

In above judgments also respective High Courts have held that treatment of in-house patients is not amounting to sale.

e) Even the extended meaning of ‘sale’ under Article 366 (29A) does not cover such services. Various judgments were cited in support of the same.

f) In relation to charging the medicines at MRP used for in-patient, it was contended that there is no tax collection. Reliance was placed on the judgment of Hon. Supreme Court in case of Hindustan Lever Ltd. (93 VST 452).

Supporting the order of the First Appellate Authority argument on behalf of Sales Tax department were as under:

(a) In pharmacy, there is common stock and there is no difference between supplying medicines over the counter and supplied for treatment of in-patient.

(b) To show sales of goods, Department also cited instances that the patients take away unused medicines with them while taking discharge.

(c) Judgments cited by hospital including BSNL were tried to be distinguished on ground that they relate to composite transactions and not the one where sale is discernible.

(d) Judgments of Kerala High Court in case of Malankara Orthodox Syrian Church (135 STC 224)(Ker./) and PRS Hospital v. State of Kerala, 2003 (11) KTR 176 were relied upon. In those judgments, based on facts and legal position under respective Acts, the activity of Hospital was held as covered by Sales Tax Acts.

(e) The arguments were also made to treat these transactions as deemed sales by Works Contract or transaction of hotel service on ground there is transfer of medicines for human consumption.

(f) The provisions of MRP/Drug Price Control Order relied upon, to suggest that the prices are inclusive of tax. It was contended that tax is collected which cannot be allowed to be retained by hospital.

Hon. Tribunal has analysed arguments from both sides in elaborate manner.

Hon. Tribunal held that the basic nature of transaction is of rendition of services. The intention of parties is not to sell/purchase medicines but to be administered by doctors in course of treatment.

Hon. Tribunal examined position whether there is discernible sale or not, in following words.

“44. The next question is whether the supply of medicine in the course of treatment are discernible sale so as to attract the main definition of sale i.e., sale as per the Sales of Goods Act. The Appellant Officer in para 116 of his order remarks that intention of private hospital is to sell the medicine and earn profit. This may be so, but whether the patient intends to purchase medicine when admitted to hospital? Even in a composite contract, for a sale to be discernible, it must satisfy all the criteria for sale as per Sale of Goods Act. In Gannon Dunkerley (8 STC) the concept of sale has been discussed.

In para 16 the Court has said:

“.. In order to constitute a sale, it is necessary that there should be an agreement between the parties for the purpose of transferring goods which of course presupposes capacity to contract, that it must be supported by money consideration and that as a result of the transaction property must actually pass in goods. Unless all these elements are present, there can be no sale.”

“We are accordingly of the opinion that on true interpretation of expression ‘sale of goods’ there must be an agreement between the parties for the sale of very goods in which property eventually passes.”

45. Thus, when a patient is admitted to hospital, his intention is not to buy medicine, nor are the medicines identified or agreed to be delivered to patient before administering the same during course of the treatment. It is not correct to say that as soon as bills are prepared by pharmacy, the goods are ascertained and delivered to the patients. These bills to in-patient according to appellate authority himself, are as per requirement of DCPO and for the purpose of books to be maintained according to DCPO. In large organisations, which to an outsider is single entity, there may be internal divisions incorporating the concept of profit centre for each division. Such divisions do not make them a separate entity from the single whole for transaction with outside person. Internal dynamism may allow pharmacy to operate as a profit Centre treating everything issued from it same as any other sale but that does not make it a sale same as over the counter sale to customer. The fact that billing from over the counter and to in-patient is same and same price is charged also does not make it different. In a restaurant, there may be sale from counter as well as service. The billing may be same and even price may be same for the both types of sales, yet first is sale simplicitor and second is a deemed sale.”

Tribunal with reasons rejected arguments of department.

The argument that it can be deemed sale under clauses 366(29A) is also rejected. It is held that it is transaction of service and not works contract.

It is also held that the circular issued by Commissioner of Sales Tax is binding. It is also held that though charges for medicines are at MRP, there is no collection of tax, but it is price.

Hon. Tribunal thus concurred with appellant hospital and deleted levy.

In respect of argument about charges for special bed etc., also Tribunal held that there is no lease transaction. The patient cannot take such goods outside. Therefore, there is no lease sale in respect of such goods also.

Similarly, there cannot be tax on food included in room rent as it is not separable nor provided for in Rules. Rule 59 of MVAT Rules is meant for hotels and not for hospitals. Tribunal deleted such levy also.

In final, Hon. Tribunal allowed appeal of appellant in all respects. The sum and substance of the issue is that the Hospital treatment transaction is held as service transaction and cannot be subjected to VAT.