TPAs to cut tax on hospital payments

NEW DELHI: Third party administrators (TPAs) facilitating cashless health treatment in hospitals for those holding health insurance will have to deduct tax upfront when they make payments to hospitals on behalf of patients, says a new rule of the tax department.

The 10% TDS (Tax Deducted at Source) will affect working capital management of the hospitals and, thereby, erode profitability marginally.

The Central Board of Direct Taxes has issued a circular making it mandatory for TPAs to deduct tax at source on their payments to hospitals, a finance ministry official told ET.

The new provisions will apply retrospectively from 2003 and will hit TPAs themselves. They would be liable to cough up tax, interest and penalty for past six years, as the circular brings TPAs under the ambit of the TDS provision from 2003.

The tax burden on TPAs could range between Rs 50-100 crore, as hospitals would not be willing to take the retrospective tax burden on their books.

“This is bound to hit TPAs very hard and some of them may be forced to close down”, said Nayan Shah, founder president of TPA association in India.

The circular, which is a directive to CBDT’s field officials, has been issued after a recent Karnataka High Court verdict in favour of such a tax deduction at source.

TPAs had also contested deduction of tax at a rate of 10% under the section 194J of the Income Tax Act, a provision applicable on professionals.

TPAs had asked the tax authorities to keep them out of the TDS ambit as they made payment to hospitals on behalf of individuals and individuals did not have to deduct tax. They had also argued that if they were to be brought under TDS ambit then a lower rate of 2% applicable on contracts be applied.

However, if the hospital has settled its tax claims, then TPAs would only be liable to pay interest applicable at the rate of 1% and penalty.

For tax authorities, TDS represents an efficient and non-intrusive way of collecting tax. A taxpayer can set off tax deducted at source against his actual tax liability when he files his income tax return. But, it increases working capital requirement, ultimately pushing up the cost of the product or service.

In this case, hospitals may pass on the additional cost to consumers.