Taxman may mop up Rs 600 cr more 

HC Ruling Directs Third Party Administrators To Deduct Tax On Payments Made To Hospitals 

TAX authorities now can raise an additional Rs 600 crore or more, on the strength of a Bombay High Court order that held that third party administrators (TPAs) companies that liaise between insurers and hospitals to facilitate cashless treatment for policyholders are required to deduct taxes while making payment to hospitals. This May 2010 order was on a writ petition filed by Dedicated Health Care Services. It was the latest in a series of litigation between TPAs and the income-tax department. The Karnataka High Court too had held, in Medi Assist case, that TPAs are required to withhold taxes while making payments to hospitals.T he Bombay High Court order, however, set aside a CBDT circular stipulating penalty on TPAs for non-deduction of taxes.

TPAs have been depositing tax deducted at source with the IT department under protest ever since the ciruclar was issued, Paramount Health Services director Nayan Shah told ET. The association of TPAs has 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 ICICI Lombard customer service head, health and accident, Sanjay Datta, it will bring more of the unorganised heathcare service providers into the tax net. 

The money reimbursed to hospitals for cashless services to policyholders amounts to Rs 4,000 crore annually. Of this,60% is facilitated by TPAs, who make the payment out of floating funds that are parked with them by non-life insurance companies. In return for their services, the TPAs receive a commission from insurance companies of about 5% on the health insurance premium. I-T authorities claim that the TPAs have to deduct tax at the rate of 10% at source before making payments to hospitals. The Mumbai I-T department had carried out surveys last year on six TPAs and raised tax demands ranging from Rs 3 crore to Rs 69 crore. The survey had revealed that none of them had deducted tax 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 I-T Act which deals with payment for professional services, or a fee for technical servcies or royalty. The Karnataka High Court had observed that since it is the TPA which is the authority in making payments to hospitals, the TPA is obligated to deduct TDS. It had also observed that the critical factor in deciding this issue is the fact that the agreement for paying to the hospitals is between TPA and hospital. The TPAs claim that they dont make the payment to hospitals in discharge of their own personal liability and responsibility, but only in discharge of the primary liability and responsibility of the insurance companies which provide funds to TPA in the form of a floating account.

Economic Times, New Delhi, 14-06-2010.