Baba Ramdev's trusts selling Ayurvedic medicines in India and abroad are now in the eye of a storm. The Income-Tax Department has slapped them with a tax bill of Rs 58 crore for the assessment year 2009-10, on the ground that these activities are commercial in nature.

Most non-corporate hospitals outside the government sector are constituted as public charitable trusts, for providing medical relief. And most of the educational institutions in the country outside the government sector are constituted as public charitable trusts, for providing education. The definition of charitable purpose includes medical relief and education.

The Supreme Court had long ago held that the idea of charity for income-tax purposes is not the same as commonly understood — offering goods and services gratis or free of cost to the beneficiary. In the event, all these hospitals and educational institutions enjoy tax-free income, despite charging market rates from their patients and students respectively; but they are supposed to recycle the profits from these activities into the same charitable purposes within the prescribed time. It is another matter though that in the course of recycling, the architect of the trust, the trustees and those in their charmed circle benefit immensely. .

HOSPITAL-CENTRIC VIEW

Now, to a related issue. There is somehow a strange consensus among authorities that hospitals alone provide genuine healthcare. The scepticism with which Ramdev's medicine sale activity has been approached by the Department is of a piece with the dismissive attitude towards medication expenses incurred by employees. While generally all hospitalisation expenses reimbursed by the employer to employees are tax-free, the cost of medicines reimbursed is exempt up to a measly Rs 15,000 a year.

This is patently unfair. A child fracturing her leg may be hospitalised and the employer may pick up the tab. This would be tax-free in the hands of the employee if the hospital is an approved one. But the cost of life-long diabetic medicines purchased for his parents do not pass muster similarly because they are not hospitalisation expenses.

The Department naturally is deeply suspicious of chemists' bills because it is common knowledge that they are pliable and often give bills for the asking for a suitable quid pro quo — purchase of toiletries, health drinks, or payment of commission. While it is true that fake chemists' bills are that much easier to generate vis-à-vis hospital bills, it would be wrong to tar everyone with the same brush.

There is no reason why the cost of diabetes medication reimbursed by the employer should not be fully tax-free, subject to the medicines having been prescribed by a doctor of approved hospitals. It is not only the taxman who views non-hospitalisation expenses with scepticism. Insurers, too, refuse to pick up the tabs stemming out of mediclaim policies if the patient was not hospitalised for a prescribed minimum duration.

MEDICINE COST OVERLOOKED

Health experts, too, now believe in the clichéd expression, ‘prevention is better than cure'. Most ayurvedic medicines may belong to the preventive genre, but that by itself does not disqualify them from being called medicines. The Supreme Court has in a number of cases allowed zero duty status for preventive ayurvedic medicines, on a par with curative ayurvedic medicines. Enlightened insurance companies also see wisdom in reimbursing preventive expenses like a treadmill, that have the potential to keep heart attacks and high blood pressure at bay and therefore also hefty medical bills.

The taxman's grouse in Ramdev's case, however, does not arise from the hair-splitting between preventive and curative medicines. An impression somehow has gained ground that services are more honourable and, hence, more worthy of exemption than sale of goods. Which is why a charitable hospital run as a public trust is let off, whereas a charitable public trust selling medicines is looked at with a microscope.

The Tax Department has a point though — most educational institutions and hospitals enjoying tax-free income in this country make horrendous profits, but thumb their noses at the taxman. A wholesale amendment to the income-tax law — that taxes all profits whether earned by a public trust or a commercial organisation — is required to address the conundrum. Sale of goods alone should not fuel the suspicion of the taxman that the activity is commercial. Even proffering of services can be commercial.

(The author is a New Delhi-based chartered accountant)

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