GST Exemption on Healthcare Services Under Revenue-Sharing Models: Karnataka High Court Ruling Explained

Introduction

The Karnataka High Court in Healthcare Global Enterprises Ltd Vs Assistant Commissioner of Commercial Taxes has delivered a significant judgment clarifying the GST treatment of healthcare services rendered under revenue-sharing or similar collaborative arrangements between two clinical establishments.

The Court has affirmed that where the underlying supply is “healthcare services” provided by a clinical establishment to patients, exemption under Sl. No. 74 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017 continues to apply, even if the services are delivered through another hospital and the consideration is structured as a share of gross patient revenue.

The decision squarely rejects the Revenue’s attempt to recharacterize such arrangements as taxable “Support Services” under SAC 9985 liable to 18% GST, and reiterates that the Department cannot, in substance, tax what is explicitly exempted by law.

Background of the Case

Parties and Business Model

  • Healthcare Global Enterprises Ltd. (“the Petitioner”) is a public limited company and a clinical establishment registered under the Clinical Establishments (Registration and Regulation) Act, 2010.
  • The Petitioner is engaged in:
    • Healthcare services
    • Medical laboratory and diagnostic imaging
    • Technical testing and related services

To expand access to specialised medical services, the Petitioner entered into a Medical Services Agreement dated July 10, 2017 with M/s Suchirayu Health Care Solutions Ltd. (“SHCS”), which operates a multi-specialty hospital at Hubli.

Under this agreement:

  • The Petitioner deployed its own team of qualified:
    • Doctors
    • Specialists
    • Technicians
    • Para-medical staff
  • These professionals rendered medical treatment to in-patients and out-patients at SHCS’s hospital.
  • SHCS billed patients for all medical services and related facilities.
  • As commercial consideration, the Petitioner was contractually entitled to 75% of the actual gross collections realized by SHCS from patients, covering:
    • Medical services
    • Diagnostic and imaging investigations
    • Surgical procedures
    • In-patient treatment
    • Pharmacy sales
    • Allied services (including food, beverages and other patient-related services)

This was thus a classic revenue-sharing model between two registered clinical establishments where one entity (the Petitioner) provided professional healthcare resources and expertise at the premises of the other (SHCS).

Department’s Investigation and Show Cause Notices

The GST authorities conducted an inspection of the Petitioner’s affairs and thereafter issued Show Cause Notices under Section 73 of the CGST/KGST Act, 2017 for the periods:

  • Financial Year 2017-18
  • Financial Year 2018-19
  • Financial Year 2019-20
  • Financial Year 2020-21
  • Financial Year 2021-22

The Department alleged that:

  • The Petitioner was supplying skilled doctors, technicians and related support to SHCS.
  • The 75% share of gross patient revenue received by the Petitioner represented consideration for “Support Services” rendered to SHCS.
  • Accordingly, the services were classifiable under SAC 9985 as other business support services and chargeable to GST at 18%.
  • Differential tax, interest and penalty were proposed by issuing SCNs and Forms GST DRC-01 / DRC-01A.

Aggrieved, the Petitioner approached the Karnataka High Court by way of writ petitions challenging the jurisdiction and legality of the Show Cause Notices themselves.

The central question before the High Court was:

Whether healthcare services provided by the Petitioner to patients through another hospital (SHCS), under a revenue-sharing arrangement, continue to enjoy exemption under Sl. No. 74 – Heading 9993 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, or whether such activity can be reclassified as taxable “Support Services” under SAC 9985 attracting 18% GST?

In other words, could the Department bypass the healthcare exemption by treating the arrangement as a B2B support service between two entities, despite the underlying activity being medical treatment rendered to patients?

Statutory Framework and CBIC Clarification

Exemption under Notification No. 12/2017-Central Tax (Rate)

Sl. No. 74 – Heading 9993 of **Notification No.