Hospital pharmacy medicines to in-patients qualify as composite healthcare supply exempt from GST under Notification 12/2017
The AAR held that supply of medicines and consumables to in-patients by a hospital pharmacy constitutes a composite supply of healthcare services exempt from GST under Notification 12/2017. The ruling distinguished between in-patient and out-patient services, determining that medicines supplied to in-patients during admission until discharge are naturally bundled with principal healthcare services and qualify for exemption. However, medicines supplied to out-patients are separate taxable supplies independent of healthcare services and do not qualify for the composite supply exemption.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Authority for Advance Ruling (AAR) were:
- Whether the supply of medicines and consumables by the pharmacy unit of a clinical establishment to in-patients during their admission constitutes a "Composite Supply" of health care services under GST law.
- Whether such composite supply is eligible for exemption under Notification No. 12/2017 CT (Rate) read with Section 8(a) of the CGST Act, 2017.
- Whether the exemption and composite supply treatment applicable to in-patient supplies extends similarly to supplies made to out-patients.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Classification of supply of medicines and consumables to in-patients as composite supply of health care services and applicability of exemption.
Relevant legal framework and precedents:
- Section 2(30) of the CGST Act, 2017 defines "Composite Supply" as a supply consisting of two or more taxable supplies of goods or services or both, naturally bundled and supplied in conjunction with each other in the ordinary course of business, with one principal supply.
- Notification No. 12/2017 CT (Rate) dated 28.06.2017 (as amended) exempts health care services provided by clinical establishments or authorized medical practitioners under SI.No.74.
- The definition of "Clinical Establishment" and "health care services" under the said notification includes services by way of diagnosis, treatment, or care for illness, injury, deformity, or pregnancy.
- Circular No. 32/06/2018-GST dated 12.02.2018 clarifies that food supplied to in-patients as advised by doctors/nutritionists forms part of composite health care supply and is exempt, while food supplied to out-patients or visitors is taxable.
- Precedents include Tamil Nadu AAR rulings in M/s. Royal Care Speciality Hospital Ltd and M/s. Be Well Hospitals Pvt. Ltd., which held that supply of medicines and consumables to in-patients is a composite supply of inpatient health care services exempt under the relevant notification.
- Kerala High Court ruling in Nils Abbott Healthcare Ltd emphasized that supplies by different persons cannot be clubbed to create a composite supply; composite supply analysis must be on supplies at a given point in time.
Court's interpretation and reasoning:
The AAR examined the nature of supplies made by the applicant's pharmacy unit to in-patients and found that these medicines and consumables are naturally bundled with the principal supply of health care services provided by the clinical establishment during the patient's admission. The supply of medicines is integral and essential for treatment and forms part of the complete gamut of health care services rendered from admission to discharge.
The Authority noted that the applicant's pharmacy and clinical establishment share a common GSTIN, confirming that the pharmacy is not a separate entity but part of the clinical establishment. The invoices submitted showed that the consolidated billing included health care services, investigations, medicines, and consumables without charging GST for in-patient supplies.
The Authority relied on the definition of inpatient services under SAC 999311, which includes medical, pharmaceutical, paramedical, nursing, and laboratory services provided under medical direction to in-patients. This comprehensive definition supports the view that medicines supplied during admission are part of the composite inpatient service.
The exemption under SI.No.74 of Notification No. 12/2017 CT (Rate) was held to apply to such composite supply, as the clinical establishment provides health care services inclusive of medicines and consumables necessary for treatment.
Key evidence and findings:
- Common GSTIN registration of hospital and pharmacy.
- Sample invoices showing consolidated billing for in-patient services inclusive of medicines without GST charged.
- Circular clarifying exemption on food supplied to in-patients as part of composite supply.
- Judicial and Advance Ruling precedents confirming composite supply classification for similar facts.
Application of law to facts:
The Authority applied the statutory definition of composite supply and the exemption notification to the facts. Since medicines and consumables are supplied in conjunction with health care services to in-patients and are essential for treatment, they qualify as a composite supply with health care services as the principal supply. The exemption notification explicitly covers such services by clinical establishments, thereby exempting the composite supply from GST.
Treatment of competing arguments:
The applicant argued that there is no distinction between supplies to in-patients and out-patients for exemption purposes, asserting that medicines supplied to out-patients also form part of composite health care services.
The Authority distinguished this by noting that out-patients are not mandated to purchase medicines from the hospital pharmacy and may buy from any pharmacy, making the supply independent and not naturally bundled with health care services. The circular and notification clarify exemption applies to services rendered to admitted patients, and supplies to out-patients are taxable.
Conclusions:
The supply of medicines and consumables by the pharmacy unit to in-patients during admission is a composite supply of health care services under GST and is exempt under SI.No.74 of Notification No. 12/2017 CT (Rate).
Issue 2: Applicability of composite supply and exemption to supplies made to out-patients.
Relevant legal framework and precedents:
- Same as above, with emphasis on the exemption notification and circular clarifications.
Court's interpretation and reasoning:
The Authority noted that out-patients visit for consultation or follow-up and may be prescribed medicines, but they are free to purchase medicines from any pharmacy. Thus, the supply of medicines to out-patients is not naturally bundled with health care services and does not constitute a composite supply.
The circular explicitly states that food supplied to out-patients or visitors is taxable, which analogy extends to medicines and consumables supplied to out-patients.
Key evidence and findings:
- Applicant's admission that out-patients can purchase medicines from outside pharmacies.
- Circular No. 32/06/2018-GST clarifications on food supply.
Application of law to facts:
Since medicines supplied to out-patients are independent supplies and not bundled with health care services, they are taxable under GST and do not attract exemption under the healthcare services notification.
Treatment of competing arguments:
The applicant's contention that supplies to out-patients should be treated similarly as in-patients was rejected based on the statutory and circular clarifications and the nature of supply.
Conclusions:
Medicines and consumables supplied to out-patients do not constitute a composite supply of health care services and are taxable under GST.
3. SIGNIFICANT HOLDINGS
- "Supply of medicines and consumables used in the course of providing health care services to In-patients by pharmacy unit of Maha Critical Speciality Division having common registration within Tamil Nadu for diagnosis or medical treatment or procedures till discharge is a composite supply of in-patient healthcare service as defined in Para 2(zg) of Notification No. 12/2017, CT (Rate), dated 28.06.2017 as amended and Notification No. II(2)/CTR/532(d-15)/2017 vide G.O.Ms.No.73, dated 29.06.2017, as amended and the same is exempted from CGST and SGST as per Sl.No.74 of the above notifications respectively."
- The Court established that medicines and consumables supplied to in-patients by a clinical establishment's pharmacy unit form part of a naturally bundled composite supply with health care services, with health care services being the principal supply.
- The exemption under Notification No. 12/2017 CT (Rate) is applicable to such composite supplies provided by clinical establishments to in-patients.
- Supplies to out-patients are distinct and independent supplies and do not qualify as composite supplies of health care services; hence, GST is applicable on such supplies.
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