sales tax-hospital-medicines

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Sales tax or VAT on sale of medicines in hospital:

Drugs and Medicines are sold in out patient dept and in patient dept in hospital against doctor’s prescription for cash or money consideration by issuing sale bill under drug license and under Essential commodities Act- DPCO – DRUG AND PRICES CONTROL ORDER. Hospitals are not paying sales tax on sale of medicines sold to indoor patients citing that it is supplied as part of treatment or at best it is service activity. but in reality such supply of medicines and drugs are also treated as sale and liable for sales tax. Sales tax or VAT on sale of medicines in hospital

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Hon’ble Supreme Court in case of BSNL [2006 ] 3 VST 95 has held that i t is possible for the State to tax the sale element provided there is a discernible sale. sale of medicines is effected under Drug and Cosmetic Act and Drugs (Prices Control) Order, 1995 , has all the attributes of ‘sale’ and is liable to be treated as ‘sale’ under local sales tax laws as sale is discernible in transaction.

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Private hospitals cannot take benefit of item 5 and 5A of schedule K of Drugs and Cosmetic Rules, 1945. Only government hospital and individual RMP is excluded from obtaining drug license for selling medicines under item 5 and 5A of schedule K of Drugs and Cosmetic Rules, 1945 , Private hospital needs drug license. Hence the provisions of Chapter IV of Drugs and cosmetic Acts are applicable to them. The provisions of DPCO (drug prices control order) which has been issued by Central Government, under section 3 of Essential commodities Act , are also applicable to private hospitals and their pharmacy.

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According to DPCO Para 20(3), it is mandatory for every dealer to maintain the cash memo or credit memo, books of account and records of purchase and sale of drugs. The dealer includes the hospital that is retailer of drugs and medicines. Para 16 of DPCO clearly mentions that’ no person shall sell any bulk drug or formulation to any consumer at a price exceeding the price specified in the current price list or price indicated on the label of the container or pack thereof, whichever is less, plus all local taxes,  if any, payable.’

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Department of Chemicals & Petrochemicals, GOI, has issued an order dated 26/6/2006 amending DPCO under ECA,1955. In the said order, the manufacturers had been allowed to print Maximum Retail price (inclusive of all taxes) for medicines manufactured after 2nd Oct 2006. stricter implementation of DPCO is upheld by the Hon’ble Supreme Court of India in case of Union Of India v/s Glaxo India Ltd. & Anr . decided on 30 /3/ 2011 as well as by Hon’ble Bombay High Court, in case of N.R. Jet Enterprises Ltd. Being A ... v/s National Pharmaceutical in its order dated 15 /4/ 2008.

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The transaction of supply of medicines to indoor patients is eligible to be treated as ‘sale’ by operation of law i.e. Drug and Cosmetics Act and DPCO (Essential Commodity Act): the ratio of decision of Hon’ble Supreme Court in case of Coffee Board v. Commissioner of Commercial Taxes [1988] 70 STC 162 (SC) is applicable. The transaction of supply of medicines to indoor patients is eligible to be treated as ‘sale’ due to ‘statutory compulsion’ and hence exigible to sales tax : The decision in case of Vishnu Agencies ( Pvt ) Ltd. v. Commercial Tax Officer , 1978 AIR 449, 1978 SCR (2) 433 , a seven-Judge Bench of the Hon’ble Supreme Court, is applicable.

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According to t he decision of Hon’ble Kerala High Court , in case of Malankara Orthodox Syrian Church v/s Sales Tax Officer And Anr . and in case of P.R.S. Hospital v/s State Of Kerala decided on 20 December, 2002 an activity of supply of medicines to inpatients during the treatment is activity covered by definition of “sale’. According to the decision of Hon’ble Kerala High Court in case of Qualified Private Medical vs State Of Kerala the dealer cannot sell medicines to patients directly. Such sale can only be effected only under drug license. The Maximum Retail Price of drugs and medicines has been fixed by NPPA, in which element of local Tax (VAT) is also included. Para 19 of DPCO prohibits the retailer from earning excess profit than 16% in case of Scheduled medicines. the hospital may claim transaction of supply of medicines to indoor patient as service or non sale, but in reality it is sale transaction and exigible to sales tax as consideration is received in cash.

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in the final bill issued to the patient at the time of discharge, item wise sales in chronological order, of each medicine sold, along with quantity and price thereof is mentioned. Hence as decided by the Hon’ble Apex court in BSNL case, [2006] 3 VST 95 , when ‘sale element is discernible in the transaction’ , then State has power to tax such sale under Sales Tax Law . The sale consideration of medicines is recovered from the patients at MRP which is inclusive of VAT or sales tax. Hence sale of medicines which has been effected under Drug and Cosmetic Act and Drugs (Prices Control) Order, 1995,has all the attributes of ‘sale’ and is liable to be treated as ‘sale’ under S ales Tax Act and exigible to Sales Tax

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