VAT Ruling No. 015-06

December 11, 2006 VAT RULING NO. 015-06 Revenue Regulations # 16-2005, 05-1987; Executive Order 273; Tax Code of 1997, Section 109 (G); VAT Ruling # 359-88 104-92; BIR Ruling # 023-88 St. Frances Cabrini Medical Center, Inc . Maharlika Hi-way, Sto. Tomas Batangas, Philippines Gentlemen : This refers to your letter dated 23 December 2005 addressed to the VAT Review Committee concerning your request for the issuance of a ruling on the proper value-added tax (VAT) treatment of the sale of the hospital pharmacy to in-patients. It is represented that St. Frances Cabrini Medical Center is a corporation organized and existing under the laws of the Philippines as evidenced by its Certificate of Incorporation issued by the Securities and Exchange Commission under SEC Reg. No. A1997-21803 dated 29 January 1998; that its primary purpose is to establish and maintain a general hospital, dispensary and out-patient department for medical, dental and surgical aid, care and treatment of persons in need thereof; that it is classified as a tertiary hospital and operates a wholly owned pharmacy (which is not separately created and does not have its own juridical personality) in its premises to cater to the needs of both in-patients and out-patients; that currently, it treats sales from its pharmacy to its in-patients as part of hospital services and as such are not charged with VAT, while it treats sales to out-patients (not being part of hospital service) as subject to VAT. It is your request that this Bureau addresses the following issues: 1. The correctness of the VAT treatment applied on the sale of medicine by the hospital pharmacy to in-patients as exempt (for classifying such sale under hospital service), while sale to out-patients are subject to VAT (for not being classified as part of hospital service); 2. Whether the pharmacy is required to be registered as a separate entity with this Bureau; and 3. Whether the pharmacy is required to issue separate official receipt or invoice for sales to in-patients? In reply, please be informed of the following: I. On the correct VAT treatment of sale of drugs or medicine by the hospital pharmacy to in-patients and out-patients . The National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides, viz : "Sec. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: aDSAEI xxx xxx xxx (G) Medical, dental, hospital and veterinary services except those rendered by professionals; xxx xxx xxx" In relation thereto, Revenue Regulations No. 16-2005 (Consolidated Value-added Tax Regulations of 2005) provides: "SEC. 4.109-1. VAT-Exempt Transactions . xxx xxx xxx (B) Exempt transactions . xxx xxx xxx (g) Medical, dental, hospital and veterinary services, except those rendered by professionals. Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. (Emphasis ours) xxx xxx xxx (v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One Million Five Hundred Thousand Pesos (P1,500,000.00); Provided , That not later than January 31, 2009 and every three (3) years thereafter, the amount of P1,500,000.00 shall be adjusted to its parent value using the Consumer Price Index, as published by the NSO. xxx xxx xxx" A plain reading of paragraph (g) of Revenue Regulations No. 16-2005 provides that the sale of drugs and medicine by the pharmacy or drug store operated by a hospital or clinic is subject to VAT. It is noteworthy that there is no distinction made whether the sale of such drugs and medicine by a pharmacy operated by a hospital or clinic is exempt when sold to an in-patient, and subject to VAT when sold to an out-patient. ADHcTE The interpretation of that pertinent provision of the law and its implementing regulations should, however, take into account the pronouncement of the Court of Appeals in St. Luke's Medical Center Inc. vs. Court of Tax Appeals and the Commissioner of Internal Revenue. 1 The main issue in that case is whether or not the sale of drugs and other pharmaceutical items to in-patients of St. Luke's Medical Center, Inc. is exempt from VAT within the meaning of "hospital services" under Section 103(1) (now Section 109[G]) of the Tax Code of 1997. The Court decided that the item " hospital services " includes sale of drugs to hospital in-patients as differentiated from the retailing of drugs or medicines by drugstores in general. It further pronounced that, ". . . . The maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or facility rendered by any hospital for its patients. In the legal sense, a hospital is an institution devoted primarily to the operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, injury or deformity, or in need of obstetrical or other medical and nursing care (Section 2(a), R.A. 4226). In its ordinary acceptation, it is a place where persons are given medical or surgical treatment. A person who resorts to the hospital for medical treatment can reasonably expect that the hospital would make available to its patients immediate and prompt access not only to the services of doctors, nurses and allied medical personnel, but also to necessary laboratory services as well as medicines, drugs and pharmaceutical items which are indispensable aids in practically any form of medical treatment and care of patients. The facility of making drugs and medicines available to in-patients of the hospital, whether for reasons of life-threatening urgency or mere convenience, cannot but be viewed as a hospital service that is covered by the broad and general exemption provided in Section 103(1) of the Tax Code for ' hospital services '". Based on all of the foregoing, this Office is of the opinion and so holds that generally sale of drugs or medicine by the hospital pharmacy or drugstore is subject to VAT if the gross annual sales exceeds P1,500,000.00. However, sale of drugs or medicine drawn directly by the hospital from its pharmacy to be administered to in-patients and charged as part of the hospital bill is included in the term "hospital services" and as such, is exempt from VAT. II. On whether the pharmacy is required to register as a separate entity with this Bureau . Based on your representation that the hospital pharmacy is not separately created and does not have a separate juridical personality from the hospital, it does not have to register as a separate entity with this Bureau. It must, however, register as a VAT taxpayer if the gross annual sale of drugs or medicine, other than those exempt under Section 109(G), from the pharmacy exceeds P1,500,000.00, or if it would opt to register as VAT taxpayer even if its sales of medicine does not exceed P1,500,000.00. III. On whether the pharmacy is required to issue separate official receipt or invoice for its sale to in-patients . As discussed previously, the sale of drugs or medicines drawn by the hospital from its pharmacy to be administered to its in-patients is charged as part of hospital services. Accordingly, only an official receipt shall be issued for payments received (including the payment for the drugs or medicine) for the hospital services. Conversely, sale of drugs by the pharmacy, other than those drawn by the hospital to be administered to in-patients, shall be issued separate sales invoice. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. TAScID Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. CA-G.R. SP No. 45892 dated March 13, 1998.