TaxTMI 
TaxTMI 
Hospital Diets, Outsourced Canteens and GST: Exemption Stops at the Healthcare Provider
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....ospital Diets, Outsourced Canteens and GST: Exemption Stops at the Healthcare Provider<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 25-9-2026<br>Composite Healthcare Supply Requires More Than Food Delivery The decision in Boilla Venkataramana Reddy Versus M/s. Shivenari Canteen Services. - 2026 (9) TMI 1417 - GSTAT HYDERABAD addresses an important classification issue under GST: whether food supplied by an outsourced caterer to hospital in-patients is part of an exempt healthcare service or remains an independent taxable supply of food. The dispute arose when the respondent supplied food to MGM Hospital under a contractual arrangement. The food was intended for in-patients, outpatients, staff and doctors. Th....
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....e controversy concerned food supplied for in-patients' consumption from January 2018 to November 2021. The First Appellate Authority accepted the respondent's stand that food supplied to in-patients formed part of a composite healthcare service and therefore could not be taxed separately. The Department challenged that conclusion. According to the Department, the respondent was not a hospital, clinical establishment, authorised medical practitioner or healthcare provider. It was merely an outsourced caterer supplying food to the hospital. Therefore, the benefit of CBIC Circular No. 32/06/2018-GST dated 12.02.2018, which clarified the tax treatment of food supplied to in-patients as part of a healthcare service, could not be exten....
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....ded to the caterer. Section 2(30) Demands Two or More Naturally Bundled Supplies The Tribunal began by testing the transaction against the definition of "composite supply" under Section 2(30) of the CGST Act, 2017. A composite supply requires two or more taxable supplies of goods or services, or both, naturally bundled and supplied together in the ordinary course of business, with one being the principal supply. On this test, the respondent's case failed at the threshold. In the hands of the caterer, there was only one supply: food. The respondent did not provide medical care, treatment, nursing, diagnostic services, or any other healthcare element. The contract with MGM Hospital required the respondent to supply food at agreed....
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.... rates. Therefore, the transaction did not contain two or more taxable supplies naturally bundled together in the respondent's hands. This distinction is crucial. A hospital may provide a bundle of healthcare services to an in-patient, within which a diet prescribed by doctors or nutritionists may be an ancillary element. But an outsourced caterer does not provide that healthcare bundle. It provides only food. The composite supply analysis must therefore be applied from the standpoint of the actual supplier and the supply made by that supplier. CBIC Circular Protects Food Supplied by the Healthcare Provider, Not the Outsourced Caterer The respondent relied heavily on CBIC Circular No. 32/06/2018-GST. The circular clarified that....
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.... food supplied to in-patients, as advised by doctors or nutritionists, forms part of the composite supply of healthcare and is not separately taxable. It also clarified that other supplies of food by a hospital to patients who are not admitted, attendants, or visitors are taxable. The Tribunal interpreted the circular in its proper context. The clarification applies where the healthcare service provider itself supplies food to in-patients as part of treatment. In such a case, the principal supply is the healthcare service, and food is ancillary to that service. The food and treatment are supplied in conjunction because the treatment of an in-patient may include a prescribed diet. However, the circular does not convert the supply made ....
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....by an outsourced caterer into a healthcare service. The caterer is not treating patients. It does not provide medical advice. It does not undertake the principal supply of healthcare. Its contractual supply is to the hospital, even though inpatients ultimately consume the food. The Tribunal therefore held that the Board's clarification did not affect the respondent's supply. The respondent mistakenly believed the circular covered its transaction. That misunderstanding could explain the non-payment of tax, but it could not change the character of the supply. Recipient and End-Consumer Are Not Always the Same for GST Classification A key part of the reasoning rests on the distinction between the contractual recipient and the ....
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....ultimate consumer. The respondent argued that the food was supplied to in-patients on hospital premises, based on doctors' or nutritionists' advice. On that basis, it claimed the supply should be absorbed into the healthcare service. The Tribunal rejected this approach. The respondent supplied food to MGM Hospital under an agreement. The fact that the food was ultimately consumed by in-patients did not make the caterer a healthcare service provider, nor did it make the supply a composite healthcare supply in the caterer's hands. This distinction is important for GST classification. Taxability depends on the supply made by the supplier to the recipient. The ultimate use of the goods or services may matter in some contexts, ....
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....but it cannot override the legal character of the supplier's transaction. In this case, the hospital may have provided an exempt healthcare service to its in-patients. The outsourced caterer, however, supplied food to the hospital. PAG and Hospital Clarifications Cannot Override the Statutory Scheme The respondent also relied on communications from the Principal Accountant General [PAG]and MGM Hospital to support the view that food supplied to in-patients was not taxable. These communications were said to reflect the understanding that diet supplied to in-patients formed part of a composite healthcare service. The Tribunal declined to treat those communications as determinative. Neither the PAG nor the hospital was the proper a....
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....uthority to issue a binding tax clarification on the respondent's GST liability. At best, such communications could explain the Board's circular. They could not expand the circular or create an exemption where the statutory framework did not provide one. This is a useful reminder that taxpayers must exercise caution when relying on third-party letters, internal hospital communications or audit observations. An exemption must flow from the statute, notification or a binding circular applicable to the taxpayer's transaction. It cannot arise merely from another institution's view of the tax position. Restaurant Service Classification Survived the Composite Supply Claim The Department argued that the supply was taxable ....
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....as restaurant service at 5% GST. It relied on the definition of restaurant service in the relevant rate notifications and submitted that outsourced food supply to the hospital was taxable. The First Appellate Authority had disturbed the adjudicating authority's conclusion by treating the supply as an exempt composite healthcare service. The Tribunal set aside the FAA's order. Once the composite supply theory failed and the CBIC circular was held inapplicable to the outsourced caterer, the respondent remained liable to pay GST on food supplied to MGM Hospital for in-patient consumption. The ruling therefore draws a clear boundary. Food supplied by a hospital to in-patients may be absorbed into an exempt healthcare service if su....
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....pplied as part of treatment. Food supplied by an independent caterer to the hospital does not acquire that exemption merely because in-patients consume it. Bona Fide Misreading of a Circular Does Not Establish Fraud Although the Tribunal held the supply taxable, it did not accept the Department's invocation of Section 74 of the CGST Act, 2017. Section 74 applies where tax has not been paid or has been short-paid by reason of fraud, wilful misstatement, or suppression of facts with intent to evade tax. These ingredients must be established clearly. The respondent had relied on the Board's circular, though mistakenly. The Tribunal treated this as a gross error in understanding the law and the clarification, not as deliberate ....
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....evasion. No concrete material showed mala fide intention. The fact that the adjudicating authority itself had dropped the penalty proposed under Section 122 further supported the view that the respondent had not deliberately chosen to evade tax. This part of the decision is important for interpretational disputes. A wrong legal view does not automatically amount to fraud. Where the taxpayer's conduct is traceable to a plausible, though incorrect, understanding of a circular or exemption entry, the Department must do more than show taxability. It must establish the additional ingredients required for Section 74. Section 75(2) Converts the Proceeding to the Normal Demand Route Having held that Section 74 was unsustainable, the Tr....
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....ibunal invoked Section 75(2) of the CGST Act, 2017. This provision enables the appellate authority, Tribunal or court to treat a notice issued under Section 74 as one issued under Section 73 where the charges of fraud, wilful misstatement or suppression to evade tax are not established. Accordingly, the Tribunal directed that the show cause notice be deemed issued under Section 73(1). The Tribunal directed the proper officer to determine the tax payable, along with consequential interest and penalty, on that basis. This is a balanced outcome. The taxpayer was not absolved of tax merely because Section 74 failed. At the same time, the more serious fraud-based consequences under Section 74 could not survive without proof of intent to ev....
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....ade. The ruling thus separates taxability from culpability. Cum-Tax Valuation Applies When Tax Was Not Separately Collected The Tribunal then addressed valuation. From January 2018 to November 2021, the respondent did not issue separate invoices charging GST on food supplied to in-patients. The invoice values did not indicate any tax component. There was also no allegation that tax had been collected in excess of the invoice value. In these circumstances, the Tribunal held that the declared invoice value must be treated as inclusive of tax. Rule 35 of the CGST Rules, 2017 provides the formula for determining tax when the value of supply is inclusive of integrated tax, central tax, state tax or union territory tax. Accordingly, tax ....
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....had to be extracted from the cum-tax value rather than calculated on the entire invoice amount as if it were exclusive of tax. This finding has substantial financial significance. If tax is calculated on the full invoice amount without cum-tax treatment, the taxpayer effectively pays tax on a value that already includes tax. Rule 35 prevents such over-collection by ensuring that the taxable value is determined after deducting the tax component. Statutory Benefit Cannot Be Denied Merely Because It Was Not Claimed A key feature of the ruling is that the respondent did not specifically claim the benefit of Rule 35 before the Tribunal or the lower authorities. The Tribunal nevertheless extended the benefit because the relevant facts we....
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....re already on record. The Tribunal relied on the principle that authorities must collect only the tax legally due, neither more nor less. It referred to UNICHEM LABORATORIES LTD. Versus COLLECTOR OF CENTRAL EXCISE, BOMBAY - 2002 (9) TMI 110 - Supreme Court, where the Supreme Court emphasised that tax authorities do not have a duty to deprive an assessee of a benefit available in law merely to augment revenue. This principle adds fairness to the adjudicatory process. If the record clearly shows that tax was not separately collected and the invoice value was inclusive, Rule 35 must be applied. A statutory valuation benefit does not become unavailable merely because the taxpayer did not cite the rule at the correct stage. Re....
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....-Determination Must Reflect Taxability, Normal Limitation and Cum-Tax Benefit The final outcome was partly in favour of the Department and partly in favour of the taxpayer. The FAA's order was set aside because it wrongly treated the outsourced caterer's supply as an exempt composite healthcare service. The respondent was held liable to pay GST on food supplied to MGM Hospital for in-patients' consumption. However, the demand was not to be sustained under Section 74. The proper officer was directed to re-determine liability by treating the notice as one under Section 73(1) and to recompute tax after extending the cum-tax benefit under Rule 35. The officer was also directed to verify the invoices and ascertain that no tax h....
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....ad been collected during the relevant period. The re-determination was to be completed within four weeks of receipt of the Tribunal's order, and the respondent was to be intimated within two weeks thereafter. Thus, the Department succeeded on taxability, but the taxpayer succeeded on penalty classification and valuation. Exemption Follows the Supplier's Role, Not the Patient's Consumption The broader principle emerging from the decision is that an exemption for healthcare services depends on the nature of the supplier's role and the supply made by that supplier. Food served to in-patients may form part of an exempt healthcare service when the hospital supplies it as part of treatment. But where the supplier is an in....
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....dependent caterer making a standalone supply of food to the hospital, the supply remains taxable. The judgment also provides a useful corrective against overuse of Section 74. Interpretational errors, especially those arising from a mistaken reading of a Board circular, should not be mechanically treated as fraud or suppression. Tax may be recoverable, but penal provisions require proof of intent. Finally, the Rule 35 discussion reinforces the obligation of tax authorities to compute liability correctly. The Department cannot collect more than what is legally due merely because the taxpayer failed to claim a statutory benefit. In that sense, the ruling is balanced: it rejects an unwarranted exemption claim while equally preventing dis....
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....proportionate recovery and penal consequences. *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....