Madras High Court has ruled that cost of implants including diagnosis service can attract VAT (Value Added Tax), but consultation and medicine charges will attract this tax.

This ruling can have implication in all such cases from VAT regime. In fact, the ruling has generated debate over two issues, how relief can be granted in matters dated on or before June 30, 2017 and does the principle applied in the ruling hold true in the GST (Goods & Services Tax) regime. Tax experts say, there is need for the Centre and State to do retrospective amendments in the definition of work contract to provide relief in cases related to the VAT regime. However, the good news is that this ruling is unlikely to have any implication in GST regime.

In a case, filed in 2012 by the Chennai-based MIOT Hospital, the issue was whether cost of implants such as ortho implants, plates, stents, valves, pacemakers, infra-aortic balloon pump etc., (collectively known as Prosthetic) in the body of patients for treatment by surgery along with cost for related diagnosis services such as MRI, or x-ray will be taxable under Tamil Nadu Value Added Tax Act 2006 or not. The court had to decide whether these will be part of ‘Work Contract’ or not?

The petitioner argued that charges for such a surgery is consolidated one and there is no separate charge towards cost of these items. However, State’s Tax Department said the hospital needs to pay VAT on the purported deemed sale of Prosthetic as it forms part of Work Contract. Interestingly, in four similar cases (Tata Main Hospital vs State of Jharkhand, International Hospital Pvt Ltd Vs State of UP, Fortis Health Care Vs State of Punjab and Aswini Hospital vs Intelligence Officer, Squad Number 1, Thrissur – Kerala), rulings were in favour of assessees.

Referring to the definition of ‘works contract’ under TNVAT Act, the bench opined that “words fitting out of any immovable property can bring within its purview the fixing of valves, stents, metal plates, artificial hips, and knees. It also explained that it is not only transfer of possession of prosthetics into the physiology of the patient, but also the ownership of such prosthetics to the patient for consideration in the course of the provision of medical/health service. Accordingly, it will be taxed.

Will this hold true under GST?

According to Rajat Mohan, Senior Partner with AMRG, in the context of GST, said the coverage of work contract under Section 2(119) is applicable only with respect to immovable property, thereby per se this ruling would have no implications in current taxation regime. “Also, the Madras High Court in the said order had acknowledged the fact that it is a healthcare service and that GST would be exempted on such service,” he said.

Agreeing with Mohan, Rajat Bose, Partner at Shardul Amarchand Mangaldas & Co said that supply of healthcare services is by large exempt under GST, and if any ancillary supply is made such as supply of prosthetics in the course of providing healthcare services, the entire bouquet of supply should qualify as a composite supply. “Given that the predominant supply in such a case is healthcare services, the entire bouquet of supply should be exempt from GST," he said.

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