Medicines and implants bundled with inpatient healthcare services exempt from GST under Serial No. 74

The AAR Kerala ruled that medicines, implants and supplies to inpatients are exempt from GST under Serial No. 74 of Notification 12/2017 when naturally bundled with healthcare services. However, without specific details of "other required supplies," case-by-case determination is required. For outpatients, when medicines and allied items are separately invoiced from procedural charges, each supply attracts individual GST rates based on their respective classifications rather than exemption.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) relate to the applicability of GST on the supply of medicines, implants, and other allied supplies by a charitable hospital to its inpatients and outpatients under different billing scenarios. Specifically, the issues are:

• Whether GST is leviable on the supply of medicines, implants, and other allied supplies issued to inpatients when these are provided as part of:
• a wholesome, pre-fixed consolidated treatment package covering all charges including medicines and implants, irrespective of brand and quantity;
• a limited pre-fixed package covering treatment charges only, with medicines and implants charged separately based on brand and quantity;
• no package arrangement, with all components (treatment, room rent, medicines, implants, etc.) billed separately at actuals.
• Whether GST is leviable on medicines and allied supplies supplied to outpatients undergoing procedures such as dialysis and chemotherapy, where billing is separate for procedure charges and medicines.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: GST applicability on supply of medicines, implants, and allied supplies to inpatients under different package scenarios

Relevant legal framework and precedents:

The core provisions invoked are:

• Serial No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, which exempts health care services by clinical establishments from GST.
• Section 8(a) of the CGST Act, 2017, which defines the treatment of composite supplies, stating that a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.
• Section 2(30) of the CGST Act, defining composite supply as a supply consisting of two or more taxable supplies naturally bundled and supplied in conjunction with each other, with one principal supply.
• Circular No. 47/21/2018-GST dated 08.06.2018, clarifying that if goods and services are invoiced separately, they are liable to tax at their respective rates and are not treated as composite supply.
• Relevant advance rulings by the Kerala AAR, including rulings on composite supplies and taxability of bundled services and goods.

Court's interpretation and reasoning:

The AAR observed that the health care services provided by the hospital are exempt under the Notification. Medicines and implants, which are otherwise taxable, gain exemption when supplied to inpatients as ancillary supplies naturally bundled with the principal supply of health care services. This is supported by the concept of composite supply under Section 8(a) and Section 2(30) of the CGST Act.

However, the ruling emphasized the necessity of the supplies being "naturally bundled and supplied in conjunction" with the principal supply. The applicant's inclusion of "other required supplies" in the package was noted, but the exact nature of these supplies was unspecified. The AAR cautioned that if these "other required supplies" are not naturally bundled (e.g., cosmetic/aesthetic supplies, artificial body parts, or room rent exceeding prescribed limits), they may not be exempt and would require case-by-case examination.

In the first scenario of a wholesome package, the exemption applies only if the supplies are naturally bundled with the principal health care service. In the absence of detailed information on the "other required supplies," a general ruling could not be issued.

In the second scenario involving a limited package excluding medicines and implants (which are charged separately), the same principle applies. Since medicines and implants are separately invoiced, they are liable to GST at applicable rates unless they qualify as ancillary supplies naturally bundled with exempt health care services.

Similarly, in the third scenario where all components are billed separately without any package, the taxability depends on whether the supplies are naturally bundled with the health care service. Without specific details, a general ruling was not possible.

Key evidence and findings:

The applicant's submissions and billing practices showed that currently, supplies to inpatients are billed separately, and the planned packages were prospective. The absence of clarity on the exact contents of "other required supplies" was a critical factor in withholding a definitive ruling.

Application of law to facts:

The AAR applied the composite supply provisions and exemption notification to the facts, concluding that exemption applies only to supplies naturally bundled with health care services. Separate billing of medicines and implants generally attracts GST unless they are part of a composite supply with the principal health care service.

Treatment of competing arguments:

The applicant argued that supplies to inpatients should be exempt as part of composite supply, relying on circulars and previous rulings. The AAR accepted this in principle but highlighted the need for precise identification of supplies to determine exemption eligibility. The jurisdictional officer's comments supported the view that packages wholly covering health care services are exempt, but separately charged medicines are taxable.

Conclusions:

The AAR ruled that exemption applies to supplies naturally bundled with health care services under a composite supply. However, without specific details on the "other required supplies," no general ruling on taxability could be given for the package scenarios. Separate supplies charged outside the package are taxable at applicable GST rates.

Issue 2: GST applicability on medicines and allied supplies supplied to outpatients undergoing procedures such as dialysis, chemotherapy

Relevant legal framework and precedents:

The exemption under Serial No. 74 of Notification No. 12/2017-Central Tax (Rate) applies to health care services by clinical establishments. The concept of ancillary supply and composite supply under Sections 2(30) and 8(a) of the CGST Act is relevant.

Court's interpretation and reasoning:

The AAR noted that supplies to outpatients are not part of health care services in the same sense as supplies to inpatients. Medicines and allied supplies to outpatients are not naturally bundled with the health care service and patients have the option to source these from elsewhere.

Therefore, the exemption available to health care services does not extend to medicines and allied supplies supplied to outpatients. Each supply is liable to GST at the applicable rate based on its classification.

Key evidence and findings:

The applicant's billing practice for outpatients showed separate invoicing for procedure charges and medicines. This supported the view that these supplies are distinct and taxable separately.

Application of law to facts:

The AAR applied the exemption notification and composite supply rules, concluding that medicines supplied to outpatients are taxable as they do not form part of a composite supply with the exempt health care service.

Treatment of competing arguments:

The applicant sought clarity on exemption applicability. The AAR distinguished between inpatient and outpatient supplies, rejecting the extension of exemption to outpatient medicines.

Conclusions:

Medicines and allied supplies supplied to outpatients are liable to GST at applicable rates and are not exempt under the health care services exemption notification.

3. SIGNIFICANT HOLDINGS

"Any supply that is naturally bundled with 'health care services' are exempted from GST by virtue of Sl. No. 74 of Notification No. 12/2017/ Central Tax (Rate) dated 28.06.2017."

"Without specific information on the inclusions under 'other required supplies', a ruling cannot be issued and the nature/ taxability of the supply has to be determined on case-to-case basis considering the exact nature of the supply involved."

"When medicines and allied items are supplied to the out-patients as part of treatment procedures and are separately invoiced for procedural charges, medicines and allied supplies, then the supply of each of the goods and services shall be individually liable to GST at the rates as applicable based on the classification of such supplies."

Core principles established include:

• The exemption under the GST health care services notification applies only to supplies naturally bundled as composite supplies with the principal health care service.
• Separate invoicing of goods and services generally disqualifies the supply from being treated as a composite supply and subjects them to GST at applicable rates.
• Supplies to inpatients may be exempt if naturally bundled; supplies to outpatients are taxable when billed separately.
• Determination of taxability for supplies not clearly bundled requires case-by-case examination based on the exact nature of supplies.

Final determinations on each issue are as follows:

1. In the case of a wholesome or limited package offered to inpatients, exemption applies only to those supplies naturally bundled with health care services. No general ruling on "other required supplies" can be given without further details.
2. When no package is offered and all supplies are billed separately, taxability depends on whether supplies are naturally bundled; again, no general ruling without specifics.
3. Medicines and allied supplies supplied to outpatients, invoiced separately from procedural charges, are liable to GST at applicable rates and are not exempt.

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