The Karnataka Authority of Advance Ruling (AAR) in its recent order dated 07.09.2020 on the application filed by “Siddalingappa Palalochna Rakshit” has ruled the Input Tax Credit (ITC) can be availed on equipment, furniture, reagents/consumables used for performing tests subject to restriction under Section 17(2) of the CGST Act, 2017.
Facts of the case:
- The applicant, Siddalingappa Palalochna Rakshit is a proprietary concern having brand name of “Bangalore Medical System” and registered under the provisions of the Goods and Services Act, 2017.
- They are into supply of various reagents/ medical consumables (goods) in addition to provision of diagnostic services. The applicant has been providing Molecular Diagnostic services to M/s Kidwai Medical Institute of Oncology, Bengaluru, a Karnataka Government hospital.
- They have been allotted around 5000 sq. ft. of room space to establish & set up a complete Molecular Diagnostic Laboratory. The Lab would be a complete clean room which would be built with PUF panels and Air Handling Units, Lab furniture and power backup, equipped with all the latest technology medical lab equipment.
- All the equipment would be purchased by the applicant and installed at the lab in Kidwai Hospital. The responsibility of running the lab with all necessary technical staff is also on the applicant. The applicant receives the samples from the patients and issues respective reports and charges Kidwai Hospital as per the approved prices.
ITC Issues on which Ruling was sought:
- Can the applicant avail Input tax credit (ITC) on the equipment, furniture, etc. which they are purchasing.
- Can the applicant avail Input tax credit (ITC) on the reagents/ consumables, they would be purchasing for performing the tests as the reagents or consumables are taxable and not the test.
Karnataka AAR Ruling on ITC:
- The services provided by the applicant are by way of diagnosis of an illness and hence the same are covered under “health care services”.
- The applicant established a medical diagnostic laboratory to carry out diagnostic or investigative services of deseases. Thus the applicant qualifies to be a clinical establishment.
- The services provided by the applicant are covered under clause(a) of Entry No. 74 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 and hence is exempt from tax.
- The applicant is engaged in taxable as well as exempt supplies and thus restriction of ITC under Section 17(2) of the CGST Act, 2017 will be applicable.
In view of above , the Authority comprising of Dr. M.P. Ravi Prasad and Mashood Ur Rehman Farooqui noted that the applicant needs to restrict the credit to the amount attributable to taxable supplies including zero rated supplies in the case of both capital goods as well as reagents / consumables or drugs.
Further in order it is stated that if the applicant claims depreciation on the tax component of capital goods and plant & machinery, under Income Tax Act 1961, the input tax credit on the said tax component shall not be allowed, in terms of Section 16(3) of the CGST Act 2017.
The Authority ruled that the applicant is eligible for input tax credit on the tax paid on the purchases of goods, i.e. equipments, furniture, etc. which are purchased for this project and also on the reagents or consumables which are used for performing the test, subject to the restriction of the same in terms of Section 17(2) of the CGST Act 2017.
Our Comments:
As the applicant in this case is providing diagnostic services which are exempt supplies and also engaged in supply of reagents/ medical consumables which are taxable supplies. Accordingly AAR has rightly adjudged that Input Tax Credit on reagents / consumables would be subject to restriction Section 17(2) of the CGST Act, 2017, wherein pro rata ITC needs to be reversed as per mechanism given in Rule 42 of the CGST Rules, 2017.
It may however be noted that in case the applicant had only been engaged in diagnostic services which are exempt , he would not have been entitled to any Input Tax Credit.
Further it is pertinent to mention here that as furniture and equipment’s as per facts given are installed in laboratory and thus should be used solely for diagnostic services and not for trading of goods. Thus in our view no ITC thereon can be availed by the applicant as entire ITC is restricted under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules, 2017.
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