TAX NEWS - June 2010

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India Tax: Income Tax dept to earn over Rs 600 cr from tax on hospital payments

Tax authorities can now raise an additional Rs 600 crore or more after a Bombay High Court order that held that third party administrators (TPA) — companies that liaise between insurers and hospitals to facilitate cashless treatment for policyholders — are required to deduct taxes while making payment to hospitals.

The High Court order issued in May 2010 was on a writ petition filed by Dedicated Health Care Services. This is the latest in a series of litigations between TPAs and the Income tax (I-T) department. The Karnataka High Court too had held, in the case of Medi Assist, that TPAs are required to withhold taxes while making payments to hospitals. The Bombay High Court order however set aside a CBDT circular stipulating penalty on TPAs for non-deduction of taxes.

Speaking to ET, Dr Nayan Shah, a director, Paramount Health Services said that TPAs have been depositing tax, deducted at source, with the I-T department under protest ever since the circular was issued. The association of TPAs had also decided to file a special leave petition in the Supreme Court.

Although it is an administrative hassle for the insurance industry, the tax deduction at source will not hit buyers of health insurance. According to Sanjay Datta, head of customer service, health and accident at ICICI Lombard, it will bring more of the unorganised healthcare service providers into the tax net. The money reimbursed every year to hospitals — for cashless service to policyholders — amounts to Rs 4,000 crore annually. Of this, 60% is facilitated by TPAs who make the payment out of float funds that are parked with them by non-life insurance companies. In return for their services, the TPAs receive a 5% commission from insurance companies on the health insurance premium. The Income tax authorities claim that TPAs have to deduct tax at the rate of 10% at source before making payments to hospitals.

The Income tax department, Mumbai had carried out surveys last year on six TPAs and raised tax demands ranging from Rs three crore to Rs 69 crore. The survey had revealed that none of them had deducted tax (TDS) while making payments to the hospitals, from the fund made available to the patients by the insurance companies. The I-T authorities therefore issued demand notices under section 194 (J) of the Income-tax Act which deals with payment for professional services.

The Karnataka High Court had observed that since it is the TPA which is the authority in making payments to hospitals, it is obligated to deduct TDS. The High Court had also observed that the critical factor in deciding this issue is the fact that the agreement for paying to the hospitals is between the TPA and the hospital.

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