11 August, 2014

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Applicability of DVAT on Medicines Sold by Hospitals to Patient during Treatment

‘’One of our client is running a very big hospital. They issue bill to the patients which includes Consultation fee and medication charges. Consultation fee is free from service tax which I know. I want to ask whether DVAT Is applicable on the Medicines/drugs sold by the hospital to the patient while there are being treated?’’


1.      Invoices issued by hospitals include consultation fee and medication charges (charges for medicines provided by hospitals while treating patients).

2.      As per determination order (determination order nos. 35, 59 & 62/CDVAT/2005) given by Shri R.K Verma, Commissioner, Trades & Taxes: Delhi under section 84 of Delhi Value Added Tax Act, 2004 (hereinafter referred as ‘DVAT Act’) dated: 17.03.2006, the medicines provided by hospitals are liable to VAT.

3.      In the said case, it is clarified that the ‘fee’ charged by hospitals in respect of prescriptions of medicines etc. is different from ‘costs’ which includes medicines, vaccines, implants, other medical devices.

It was further observed that ‘’medicine is as important, if not more, in terms of value and purpose as anything else in the medical treatment. Therefore, in the first place, the supply of medicine in a hospital is not merely incidental, it is as important as medical consultation or other services in the hospital. Therefore, supply of medicine in the course of medical treatment either to inpatients or to outpatients has to be taken as one of the main activities in a hospital or in a clinic. The volume, frequency and continuity or regularity of transaction in regard to purchase and sale of medicine by a hospital will be such that it will answer the definition of “dealer” under the Act beyond any doubt.’’

A conjoint reading of the definitions of “business” and the “dealer” given in
Section 2(d) and 2(j) respectively of the Act unequivocally suggests that besides the fact
that “business” as defined in Section 2(d) of the Act includes any kind of “service”
rendered, the definition of “dealer” given in Section 2(j) which and opens with the words “means any, person who carries on business in Delhi” latently includes within it a dealer who besides selling goods also or provides any kind of service in Delhi. In the case of applicant Hospitals where though, the contract for treatment etc. is a composite one but as is discernible from it, it represents two distincts and separate contracts i.e. one charging the ‘cost’ of drugs, medicines, implants and medical devices supplied by the applicant Hospitals to a patient and the other for recovery of the ‘value’ of the services of professional and skilled doctors rendered.

Moreover, the words “or any other article for human consumption” used in between and in addition to the words “food” and “Drink” in clause (vii) of section 2(zc) defining “sale” in the DVAT Act, 2004 manifests and goes to clearly denote that in using the aforesaid words in this clause, the intention of the Legislature was to include all other articles like the Drugs and Medicines etc. in the present case, in addition to the food and drink articles which too are meant for human consumption and are consumed by the patients during their diagnostic tests and the medical treatments. Thus, the supply of drugs and medicines in Hospitals against charges recovered by the Hospitals from their patients clearly fall within the meaning of clause (vii) of section 2(zc) attracting tax at the applicable rates under the DVAT Act and by virtue of the 46th Amendment of the Constitution, the ‘cost’ charged of such supplies is separable/bifurcatable from the complete “priced packages”.

Final view of the department: The applicant Hospitals are ‘dealers’ within the term used in section 2(j) of the DVAT Act, 2004 and the ‘costs’ recovered by them from the patients in respect of medicines, drugs, implants and medical devices supplied/administered or fitted to the bodies of the patients respectively during tests and the treatments which invariable are goods, are liable to tax at 5% under Entries Nos.16 and 92 reading as “Drugs and medicines including vaccines, syringes and dressings, medicated ointments produced under a drug licence, light liquid paraffin of IP grade” and “Medical equipments/devices and implants” respectively of the Third Schedule of the Act.

The same view was upheld by the department in other case of M/s. R.G. Stone Urological Research Institute.

About the Author:
CA Ankit Gulgulia
Author is Practicing Chartered Accountant in New Delhi/NCR and specializing in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at ankitgulgulia@gmail.com or at +91-9811653975.

Assisted by Mr. Akshay Chopra

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