BUDGET 2010

– NEW SERVICE ADDED TO SERVICE TAX –

HEALTH SERVICES

Executive Summary

1. New Service called ‘Health Services’ is brought in by the Finance Bill, 2010. This will be applicable from a date to be notified.

2. This service covers the payment received by a hospital from a business entity in respect of health checkup or preventive care of its employees or payment received by a hospital from a health insurance company in respect of any health checkup or treatment of its clients. The provision will not cover in cases where payments are received from individual patients.

3. Hospital has to collect service tax @ 10.30% on the gross amount received from the business entity or health insurance company and remit to the Government

Legal Provisions

1. The Finance Bill 2010 has introduced a new service called ‘health Services’ into the ambit of Service tax levy by incorporating a Section 65 (105) (zzzzo). As per the said subsection (zzzzo), ‘health services” is defined as ‘any services provided by to be provided by any hospital, nursing home or multi-specialty clinic, -

i) to an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or

ii) to a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;

2. Annexure- A to JS (TRU-II) D.O. letter dt. 26-2-2010 by Joint Secretary, TRU-II explains the above provisions as follows:

“2. Health services undertaken by hospitals or medical establishments for the employees of business organizations and health services provided under health insurance schemes offered by insurance companies.

2.1 With the change in the style of functioning of the business organizations, health check up is a routine facility provided by the employers to their employees. The main purpose is to ensure that the productivity of the organization is not adversely affected due to ill health of its employees. Such activities, commonly known as corporate health check up schemes, are undertaken by designated hospitals in order to detect any medical indicator or to ensure timely diagnosis of any disease so that prophylactic measures can be taken. In such cases, the hospital providing these services charge the employer i.e. the business organization and it constitutes expenditure for the latter. In certain cases (for example, in case of flight crew) pre-flight check ups are conducted not only to test the fitness levels but also to rule out the possibility of the flying crew being under intoxication. Such health check up schemes is being brought within the ambit of service tax under the new service.

2.2 A large number of health insurance schemes are being offered by the insurance companies under which charges for hospitalization, surgery, post-surgical nursing etc. are generally paid by the insurance company. Such insurance policies, which fall under the category of general insurance service, are already taxable. Under general insurance service, an insurance company is a service provider to its clients. Under the proposed new service, tax is also being imposed on the medical charges paid by the insurance companies to the hospitals on behalf of a business entity for its employees. As such, the insurance company would be the service receiver and the tax paid by the hospital would be available to the insurance companies as credit.

2.3 The tax on the above mentioned health services would be payable only if and to the extent the payment for such medical check up or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment. Any additional amount paid by the individual (i.e. the employee or the insured, as the case may be) to the hospital would not be subjected to service tax. This is to ensure that an individual is not required to pay a tax for which he cannot take credit.”

3. The term “business entity” has been defined in Section 65(19b) as “business entity” includes an association of persons, body of individuals, company or firm but does not include an individual;

Coverage of patients

4. The new provision covers health checkup and preventive care to employees of business entities and health checkup and treatment of persons covered by a health insurance policy.

5. It may be noted that business entity does not cover central or state government or local authority. Hence the provisions are not applicable to central/state/ local authority employees are involved.

6. If the employee is paying the hospital first and then claims a reimbursement from the business entity or insurance company, it will not attract service tax

7. Any payment made by an employer in respect of any treatment of its employee, directly to the hospital will not be covered under Service Tax. In the case of payments received from employer, any health check up or preventive care alone are covered and not the treatment.

8. Similarly, if the health insurance company pays any sum in respect of any preventive care of the insured, it will not be subjected to Service tax.

Service Provider and Service Receiver

9. From the Finance Act and the explanatory letter cited above, it can be seen that the new services is applicable only when a hospital renders any service to an employee of a business entity and the business entity or insurance company directly pays the amount to the hospital and not the employee. Even if some additional amounts are paid by the individual to the hospital, it would not be subjected to service tax.

10. However, the question arises is, when an insurance company pays for the treatment of an individual covered under a medical insurance scheme, who not an employee of any business entity, whether such payment is covered under service tax? Even though the Annexure- A to JS (TRU-II) D.O. letter dt. 26-2-2010 states that it is applicable to an employee of a business entity, a plain reading of clause (i) of Section 65 (105) (zzzzo) gives the impression that it is applicable to any person covered by a health insurance scheme. In this kind of non-compatibility, the provisions of the Act will have validity.

11. Hence, it is seen that, the new provisions are applicable only in two cases as described below:

1. Any health checkup or preventive care where the payments for such services are made by such business entity to the hospital in respect of employees of a business entity.

2. any health check up or treatment, where payment for such services is made by the insurance company to the hospital in respect of any person.

12. Hence it is seen that the Hospital will be the service provider and the business entity whose employees are availing the health services or the insurance company who pays the bill for health services in respect of the insured, will be the service receiver.

13. The following points may be noted:

1. The service provider is defined as ‘hospital’, ‘nursing home’ or ‘multi-specialty clinic’. However, these terms are not defined under the Act. Hence we have to take the meaning in the common parlance for the same. Moreover, the taxable services provided in any other types of places are not covered under the law.

2. Various disciplines are applied for rendering health care and treatment services. Service tax will be applicable to all methods including Allopathic, Ayurveda, Homeopathy, Unani, Yoga, Naturopathy, Siddha etc.

Value of Taxable Services and tax rate

14. Service Tax is levied on the value of services rendered. However in the case of health services, generally, there is no practice to identify value of such goods in the bill raised. The amount charged covers both viz. value of goods used and various other services rendered. In view of this, as a result of the proposed provision, value of goods will also be subject to ST indirectly.

15. As the provisions are silent on payments for services other than treatment, like hospitalization, room rent etc, which are included in the bill and is collected from the business entity or insurance company, as the case may be, it will be safer to collect service tax on that amounts also.

16. The hospital has to collect service tax @ 10.30% (10% service tax and 3% Cess) on the gross amount charged on the Business Entity or the Health Insurance Company as the case may be and remit it to the credit of the Central Government on a monthly basis before 5^th of next month. They have to file the half yearly returns in the prescribed format.

17. If the Hospital is not registered with the Service tax Department, the Hospital has to apply for and take registration under Service tax law. If the Hospital is already an assessee, the Hospital has to amend your registration certificate to include the ‘Health Services’ along with your existing services.

Date of application of the Provisions

The above said new provisions has not made effective as on date and will be will come into effect from a date to be notified, after the enactment of Finance Bill, 2010.

Conclusion

18. From the above discussion, the following table gives a probable permutation and combination of the scenarios and its taxability:

Matrix showing applicability of the proposed Service Tax provisions on health care services
Health services rendered by :		hospital, nursing home or multi-specialty clinic
Payment for services by:		Employer (Business Entity)	Health Insurance Companies	Others (e.g. directly by the patient)
Payment for Employee of	Type of services covered
Company, Firm, Association of Persons, Body of Individuals	Health Care	Yes	Yes	NA
	Preventive Care	Yes	No	NA
	Treatment	No	Yes	NA
Central / State Government, Local Authorities	Health Care Preventive Care Treatment	NA	NA	NA

19. Hence, from a practical point of view, the Hospital has to collect the following information immediately a patients registers his name at the hospital:

A. If he is an employee of any business entity

i. Whether he is an employee of an entity other than Central / State government or Local Authority

ii. If yes, whether he wants a health checkup or preventive care

iii. if yes, whether the employer will pay the bill directly

iv. If yes, Service Tax will be applicable

B. If he is not an employee of a business entity

i. Whether he is covered by a health insurance scheme

ii. If yes, whether he wants a health checkup or treatment

iii. If yes, whether he wants a ‘cashless facility’

iv. If yes, service tax will be applicable