Hospital pharmacies not liable to pay VAT

Mumbai: The Maharashtra Sales Tax Tribunal has passed an order saying sales tax cannot be levied on drugs and other items sold by a hospital pharmacy for treating in-house patients.

Currently, the practice is the pharmacy pays tax while procuring these items, but doesn’t pass it on to the patients. Instead, it claims a refund from the government.

The tribunal order pertains to an appeal filed by south Mumbai-based Saifee Hospital against an order of the appellate authority of the sales tax department raising a demand of Rs 2.92 crore, including penalty of Rs 1.06 crore.

The hospital claimed that giving medicines to in-patients is for treatment of disease and is not supply or sale of drugs, consumables or implants.

It said this activity would not amount to deemed sales as explained under Maharashtra Value Added Tax.

However, the department said that supply of drugs and medicines and other surgical goods by the pharmacy to a patient amounts to sale and, hence, is liable under VAT.

The hospital said, “Merely because the bills show MRP does not mean the hospital has collected taxes which are included in MRP. Collection of tax is separate. The fixation of MRP is done with a view to making the drugs available to customers at reasonable prices and the pharmacy is free to sell medicines below MRP.” It further argued that the intention is provision of service. “The patient does not approach the hospital with the intention of buying drugs and medicines, but enters into a contract for medical services without even knowing which medicines have been finally used. His sole purpose is to get treatment.”

The department said it is very clear that turnover of the hospital’s pharmacy would be taxable. “This turnover would necessarily include the amount received from in-patients to whom drugs and medicines are supplied.” The department further argued the hospital was making a profit through sale of drugs.

However, the tribunal noted that internal dynamism may allow a pharmacy to operate as a profit centre. But supply to patients differed from across-the-counter sale, it said.

The tribunal said if the pharmacy was run by a third party supply of drugs to in-patients could be termed a sale.

On the tax levied on food supplied to patients, the hospital said the same cannot be split from the room rent and it is part of the services. On the issue of mattresses required for treatment of patients, the hospital said those were special kind of beds and do not become the property of the patient, therefore, they should not be taxed.