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Deducting tax at source
September, 15th 2009

Third party administrators (TPAs) processing health insurance claims and making payments to hospitals for treatment of subscribers in cashless systems would soon have to deduct tax at source from the payments they make to hospitals. The apex direct tax body, Central Board of Direct Taxes, is likely to issue a directive to this effect, an income-tax department official told ET.

The move would increase working capital requirement of hospitals-the TDS rate is a significant 10% of the billed amount and hospitals can claim a refund on these tax payments only when filing their annual tax returns. The additional capital requirement could push up the cost of healthcare for consumers. The move would place additional burdens on TPAs as well.

The CBDTs proposed move comes in the wake of a recent Bangalore High Court ruling that makes deduction of tax at source mandatory for TPAs. In 2008, tax authorities had carried out surveys on TPAs, raising a tax demand for the tax the CBDT expected them to deduct at source from hospitals under Section 194J of the IT Act.

Under this section, providers of professional services have to deduct tax at source from their clients. TPAs had challenged these tax demands on the ground that they were making payments to hospitals on behalf of individuals (patients) and individuals are exempt from the requirement to deduct tax. The Bangalore High Court has upheld the tax authorities position.

The big question is if TPAs will be required to carry out TDS with retrospective effect or prospectively. If the CBDT wants tax deducted at source retrospectively, it would mean prolonged wrangles between TPAs and hospitals, which are unlikely to readily cough up any tax payments for past periods for which they have already filed their tax returns. And TPAs would have to pay penalty as well, and the combined burden could be in the range of Rs 50 crore-Rs 100 crore, if the circular is effective retrospectively.

Usually, tax which is deducted by TPAs can be set off or adjusted by hospitals when they file their returns. But, receiving less payment upfront increases their working capital requirement. Any increase in working capital requirement has to be then made up by other means which could mean a cost for hospitals. Hospitals could then pass on the additional cost to consumers, thereby raising cost of healthcare in a country where only 2-3% of the population has a health cover.

For tax authorities, TDS represents an efficient and non-intrusive way of collecting tax.

According to an official with a TPA which has approached the CBDT on the issue, TPAs could not be brought under TDS as they were only making payments to hospitals on behalf of individuals and individuals were not under an obligation to deduct tax from payments to hospitals.

Moreover, the official with the TPA, who did not wish to be identified, said tax authorities contention that these payments should come under those for professional services also did not hold as service rendered by hospitals were not treated as professional services under the present TDS regime.

Consumers to pay

Hospitals are unlikely to cough up tax payments for past periods for which they have already filed tax returns. TPAs will have to pay penalty as well, and the combined burden for all players could be Rs 50-100 crore per year. Usually, tax deducted by TPAs are set off by hospitals when they file their returns. But receiving lower amounts upfront could mean a cost for hospitals.

Hospitals may then pass on the additional cost to consumers, thereby raising the cost of healthcare in a country where only 2-3 % of the population has a health cover. For tax authorities, TDS represents an efficient and non-intrusive way of collecting tax. According to an executive with a TPA, which has represented to the CBDT on the issue, TPAs could not be brought under TDS as they were only making payments to hospitals on behalf of individuals.

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