The controversy surrounding GST on medicines and consumables supplied by hospitals to in-patients is often incorrectly framed as a dispute on taxability of healthcare services. Healthcare services are expressly exempt under GST, and that position is largely settled. The real dispute is narrower and more technical: whether hospitals, by charging medicines and consumables at Maximum Retail Price (MRP), collect an amount “representing tax” from patients and retain it without paying the same to the Government, thereby attracting Section 76 of the CGST Act.
This distinction is critical. Section 76 operates independently of the charging provisions and applies even where tax was not required to be collected.
Why Section 76 Is the Focus, Not Sections 73 or 74
Sections 73 and 74 address short payment or non-payment of tax where tax is legally leviable. In hospital IPD cases, invoking these sections faces inherent difficulties because the outward supply is claimed as exempt healthcare service, often argued as a composite supply with the principal supply being treatment.
Section 76, however, does not examine levy or exemption. It simply asks whether any amount has been collected as representing tax and not paid to the Government. Therefore, even if healthcare services are exempt, Section 76 can still apply if tax has in fact been recovered from the patient.
MRP, DPCO and the Embedded Tax Theory
Under the Drugs Price Control Order (DPCO), MRP is fixed by the Union Government and is inclusive of all taxes. When a medicine attracts GST at 5%, that tax element is inherently embedded in the MRP. If a hospital charges the full MRP to an in-patient, the argument advanced by the department is that the patient has borne the tax burden, irrespective of whether GST is shown separately on the bill.
The contention is that charging full MRP amounts to recovery of embedded GST, and retaining that amount without remitting it to the Government triggers Section 76.
Composite Supply: Relevant but Not Conclusive
Hospitals argue that medicines, implants and consumables administered to in-patients are inseparable from treatment and therefore form part of a composite supply of healthcare services, with healthcare being the principal supply. Under Section 8, such a composite supply would take the tax character of the principal supply, which is exempt.
While this argument is legally relevant for determining taxability, it does not conclude the Section 76 inquiry. Even an exempt composite supply cannot legally permit retention of tax collected from the recipient. Thus, composite supply and Section 76 can coexist: the supply may be exempt, yet any tax collected cannot be retained.
Meaning of “Amount Collected as Representing Tax”
A central interpretational issue is whether Section 76 applies only where tax is explicitly shown on the invoice or whether it also covers embedded or inclusive tax. The phrase used by the legislature is “representing tax”, not “shown as tax”.
This wording suggests a broader scope. An amount need not be expressly described as GST to fall within Section 76. If, in substance, the price charged represents recovery of tax from the consumer, the provision may be attracted. The law deliberately uses expansive language, and similar wording existed even under the service tax regime.
The Discount and Below-MRP Argument
Hospitals often contend that medicines are procured at heavy discounts and are sometimes sold below MRP, indicating that no tax has been recovered from patients. Factually, this argument may succeed in cases where the hospital demonstrably absorbs the tax element and passes on discounts.
However, where medicines are billed at full MRP, without any reduction, the presumption that the tax component embedded in MRP has been passed on becomes much stronger.
Is This Double Taxation?
Another objection raised is that GST is already paid by the manufacturer or distributor and that recovery under Section 76 would amount to double taxation. This argument misunderstands the GST structure. GST is a multi-stage tax, payable at every stage of supply, with credit flowing through the chain.
Section 76 does not impose GST again. It merely requires that tax already recovered from the consumer be deposited with the Government. The issue is not double taxation, but unjust retention.
If the Sec 76 is applicable to Hospital Inpatient Billing for collecting embedded tax and going by the same logic, it is applicable to every one whoever deals with selling MRP goods be it Composition Dealers and even neighbourhood Kirana stores (whose turnover may not cross even Rs. 1 lakh).
Pharmacy Sales vs In-Patient Supplies
A crucial distinction must be maintained between medicines sold through a hospital pharmacy to walk-in customers and medicines administered to in-patients during treatment. Pharmacy sales are taxable supplies where GST is clearly payable. The present controversy concerns medicines supplied by the hospital itself as part of IPD treatment, where exemption is claimed but MRP is allegedly recovered.
Section 76 scrutiny applies only to the latter category.
Policy Inconsistencies and Legislative Intent
The debate exposes policy inconsistencies. Healthcare services are exempt to ensure affordability, yet certain components like room rent above ₹5,000 are taxed. MRP under DPCO includes tax, but no refund mechanism exists for embedded tax in exempt supplies. Hospitals are mandated to issue itemised bills under drug laws, making prices transparent.
While hospitals may not have acted with intent to evade tax, Section 76 is not intent-based. It focuses on the fact of collection and retention.
The Real Test Under Section 76(1)
The decisive questions under Section 76 are factual and economic, not merely contractual. Were the goods otherwise taxable under GST? Was the printed MRP actually recovered from the patient? Did the economic burden of tax pass to the patient? Was the amount so recovered retained by the hospital?
If these conditions are satisfied, Section 76 can apply even if the underlying supply is exempt.
Conclusion
The hospital IPD GST dispute is not about taxing healthcare services. It is about whether tax recovered from patients—explicitly or implicitly—can be retained by hospitals. Composite supply principles, exemption notifications and billing formats do not dilute the statutory command of Section 76.
At the same time, demanding the entire embedded GST component without accounting for prior tax payments and minimal value addition may amount to overreach and conflict with legislative intent. The issue ultimately calls for judicial clarity and policy correction to balance patient welfare with revenue protection.
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