Composite health care supply covers in-patient hospital pharmacy items, while out-patient pharmacy supplies remain taxable.

Medicines and allied items supplied by a hospital pharmacy to in-patients were treated as part of a composite health care service because they are provided during continuous medical supervision and remain integral to treatment until discharge; they are therefore not separately taxable. Medicines and allied items supplied to out-patients were treated differently because the prescription is advisory, the patient may procure goods elsewhere, and the pharmacy supply is an independent supply of goods rather than exempt health care service; such supplies are taxable.

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Issues: (i) Whether medicines and allied items supplied by a hospital through its pharmacy to in-patients form part of a composite supply of health care services and are not separately taxable; (ii) Whether medicines and allied items supplied by a hospital through its pharmacy to out-patients are exempt as health care services or are taxable supplies.

Issue (i): Whether medicines and allied items supplied by a hospital through its pharmacy to in-patients form part of a composite supply of health care services and are not separately taxable.

Analysis: Health care services provided by a clinical establishment are exempt under Sl. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. In the case of an in-patient, medicines, allied items, lodging, care and food are provided under continuous medical supervision as part of treatment till discharge. The supply of such items is integral to the treatment process and is not a separate commercial supply.

Conclusion: The supply of medicines and allied items to in-patients through the hospital pharmacy is part of composite health care supply and is not separately taxable.

Issue (ii): Whether medicines and allied items supplied by a hospital through its pharmacy to out-patients are exempt as health care services or are taxable supplies.

Analysis: For an out-patient, the prescription is advisory in nature and the patient is free to procure medicines from any source. The hospital has no comparable control over treatment or procurement as in the case of an in-patient. The supply of medicines through the hospital pharmacy to out-patients is therefore an independent supply of goods and not part of exempt health care services. The clarification issued in F.No. 354/17/2018-TRU dated 12.02.2018 supports the distinction between composite in-patient supplies and separately taxable outpatient supplies.

Conclusion: The supply of medicines and allied items to out-patients through the hospital pharmacy is taxable.

Final Conclusion: Hospital pharmacy supplies to in-patients were treated as exempt composite health care supply, while similar supplies to out-patients were held taxable.

Ratio Decidendi: Supplies that are integral to supervised in-patient treatment constitute composite health care services, whereas supplies to out-patients are separate taxable supplies where the hospital does not exercise comparable treatment control.

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