Healthcare services with bundled medicines qualify as exempt composite supplies for inpatients but separate taxable supplies for outpatients

The AAR Karnataka ruled that healthcare services with bundled medicines and food constitute composite supplies where the principal exempt healthcare service determines the tax treatment. Medicines supplied to inpatients form part of exempt composite supplies when prescribed by doctors. However, medicines sold to outpatients who can purchase elsewhere are separate taxable supplies. Food supplied without medical advice is also treated as separate supply. The applicant can claim input tax credit only on supplies attributable to taxable services, not exempt healthcare services, with reversals required under section 17 CGST Act and Rule 42.

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Issues Involved:
1. Whether naturally bundled supplies with an exempt principal supply can be treated as composite supply and if such composite supply is exempt.
2. Eligibility to claim input tax credit on procurement of capital goods, inputs, and input services related to both taxable and exempted supplies.

Issue-wise Detailed Analysis:

1. Composite Supply and Exempt Status:
The applicant, engaged in healthcare services, sought clarity on whether naturally bundled supplies with an exempt principal supply (healthcare services) can be treated as composite supply, and if so, whether such composite supply remains exempt. The Authority examined the definitions under the CGST Act, 2017:
- Composite Supply (Section 2(30)): Consists of two or more supplies naturally bundled and supplied in conjunction, with one being the principal supply.
- Taxable Supply (Section 2(108)): Supply of goods or services leviable to tax.
- Exempt Supply (Section 2(47)): Supply attracting nil rate of tax or wholly exempt.

The Authority concluded that healthcare services, being exempt, form the principal supply in a composite supply. Consequently, supplies of medicines and food to inpatients, as advised by doctors, are part of the composite supply and hence exempt. However, supplies to patients not advised by doctors or to attendants are not naturally bundled and are taxable. For outpatients, if medicines are not mandatorily purchased from the hospital, they are not part of a composite supply and are taxable.

2. Valuation of Supplies:
The valuation of medicines and food when part of a composite supply depends on whether they are included in a single price for healthcare services. If included, no separate valuation is required. If not, and they form a mixed supply, the highest applicable tax rate applies. If supplied independently, they are taxed separately based on Section 15 of the CGST Act.

3. Input Tax Credit (ITC):
The applicant questioned the eligibility to claim ITC on inputs, input services, and capital goods used for both taxable and exempt supplies. The Authority referred to:
- Section 16(1) of CGST Act: Entitles registered persons to credit of input tax on supplies used in business.
- Section 17(2) of CGST Act: Restricts ITC to the extent attributable to taxable supplies.

The Authority ruled that ITC can be claimed only for inputs, input services, and capital goods attributable to taxable supplies. For exempt supplies, including healthcare services, ITC must be reversed as per Section 17 and Rule 42 of CGST Rules, 2017.

Ruling:
1. Naturally bundled supplies with an exempt principal supply can be treated as a composite supply, and such composite supply is exempt if the principal supply is exempt.
2. ITC can be claimed only for taxes paid on inputs, input services, and capital goods attributable to taxable supplies, not exempt supplies.

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