Healthcare Services Provided Through Hospitals Exempt from Tax: Karnataka HC Quashes GST Demand Notices Against HCG Enterprises [Read Order]

The High Court of Karnataka at Bengaluru has allowed three writ petitions by Healthcare Global Enterprises Ltd (HCG), holding that healthcare services provided by the petitioner through another hospital are exempt from the levy of Goods and Services Tax (GST).

The Single Judge Bench, comprising Justice S.R. Krishna Kumar, ruled that the revenue-sharing model between the petitioner and the hospital does not alter the exempt nature of the core medical services provided to patients.

HCG, a public limited company engaged in providing healthcare services, which entered into a Medical Services Agreement on July 10, 2017, with M/s. Suchirayu Health Care Solutions Limited (SHCS). Under this agreement, HCG provided medical services to patients at SHCS’s hospital in Hubli through a team of doctors, specialists, and para-medics.

The agreement stipulated a revenue-sharing model where HCG was entitled to 75% of the gross revenue generated from the patients. The Department issued Show Cause Notices (SCNs) for various financial years (2017-18 to 2021-22), contending that the services provided by HCG constituted "Support Services" under SAC 9985 and were liable to GST at 18%, rather than being exempt healthcare services.

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The counsel for the petitioner vehemently argued that the services rendered were squarely covered by the exemption provided under Notification No. 12/2017-CGST (Rate) dated June 28, 2017, specifically Entry No. 74 of Heading 9993. He relied on CBIC Circular No. 32/06/2018 dated February 12, 2018, which clarifies that healthcare services provided by clinical establishments, authorized medical practitioners, or para-medics are exempt.

The Senior Counsel submitted that taxing such services would defeat the legislative intent of keeping essential healthcare affordable and cited the Supreme Court’s decision in Commissioner of Central Excise v. Acer India Ltd. to argue that a tax cannot be levied indirectly on a service that is exempt from direct taxation.

Per contra, the respondents argued that since the petitioner received 75% of the gross revenue, the arrangement was essentially a supply of manpower or business support services to SHCS, taxable as a business-to-business transaction. They also contended that the writ petitions were premature and that the petitioner should avail of alternative remedies.

After careful consideration, the Court observed that both HCG and SHCS were undisputedly clinical establishments registered under the Clinical Establishments Act. Justice Krishna Kumar noted that the "Medical Services Agreement" clearly established that the substance of the transaction was the provision of diagnosis, treatment, and medical care to patients. The Court held that the classification of services must follow their substance. Consequently, classifying these core healthcare services as "Support Services" merely because of a revenue-sharing arrangement was untenable.

The Court further relied on the Supreme Court’s judgment in Government of Kerala v. Mother Superior Adoration Convent, emphasizing that beneficial exemptions in tax statutes must be interpreted liberally to give full effect to their object. It was held that taxing the petitioner would effectively increase the cost of medical treatment for patients, as the tax burden would eventually be passed on, thereby defeating the purpose of the exemption.

Rejecting the Department’s contention that the writ petitions were premature, the Court held that when an SCN is issued without jurisdiction or contrary to law, the availability of alternative remedies does not bar the writ jurisdiction of the High Court under Articles 226 and 227 of the Constitution.

The Court declared that the services provided by HCG through SHCS were exempt from GST under the aforementioned Notification and Circular. Accordingly, the impugned Show Cause Notices issued for the financial years 2017-18 through 2021-22 were quashed.

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