Thiruvananthapuram: The Director General of GST Intelligence (DGGI) issued a show-cause notice early this month to the Kerala branch of Indian Medical Association (IMA) saying that it was using shell companies to stash its profits from commercial activities and, thereby, preserve its status as a charitable organisation.

The IMA has been registered under Section 12AA of Income Tax Act, 1961, as a charitable organisation. In the notice served to the IMA on August 2, the DGGI says that Rs 251.79 crore the IMA collected between July 2017 and March 2023 from various schemes it had floated and deliberately kept separate from its balance sheet had escaped the GST net.  

In addition to various services provided to its members -- doctors and their families -- the association engages in multifaceted business endeavours, including insurance, residential complexes and management of biomedical waste.

Indian Medical Association Goes Eco-friendly (IMAGE) is one such endeavour. IMAGE operates as a distinct entity, possessing separate GST registration. However, the DGGI says that IMAGE is a subsidiary of the Kerala branch of the IMA. "Yet IMAGE's turnover is not reflected in the balance sheet of the IMA," the show-cause states.

Image building exercise
IMAGE-CBWTF (Common Biomedical Waste Treatment Facility) was established at Kanjikode, Palakkad, and commissioned in 2003 for the scientific management of biomedical waste generated from healthcare establishments in Kerala.

In its Income Tax returns it claims to be an Association of Persons (AOP), but with 99% of the share with one party, the IMA, and the second party being secretary of IMAGE, who again is an IMA member. "So practically IMA and IMAGE appear to be the same entity," the notice states.

One reason why the GST Intelligence has reached this conclusion is the document at the heart of IMAGE's incorporation. It was the registration certificate issued to the IMA by the Kerala Registrar of Societies that IMAGE had uploaded as its incorporation document. The show-cause calls it a "strange case of using the incorporation document of one entity to get GST registration of another entity".

Further, the fixed assets of land and buildings as shown in the financial documents of IMAGE are, according to documents placed before the GST Intelligence, owned in the name of the state president, IMA. IMAGE does not pay rent either to the IMA for utilising the land for commercial purposes.

"During the investigation, it appeared that IMAGE is an entity used by the IMA to separate its commercial activity from its books of account and hide it in order to evade tax scrutiny as the latter enjoys charitable status under Income Tax which may be liable to be cancelled if the government becomes aware of its business activities," the DGGI notes in the notice.

In the name of charity
IMAGE operates by sub-contracting the collection and management of the biomedical waste of the clients (government and private hospitals, labs and clinics) to Chennai-based company GJ Multiclave (India) Pvt Ltd. The IMA has entered into agreements with this Chennai-based company under which 12% of the total invoice amount generated for the BMW management services is kept by the IMA for meeting the administrative expenses and the balance amount is paid to Multiclave for the operational expenses.

IMAGE serves around 20,000 hospitals, clinics and such establishments across Kerala for consideration. There are two kinds of charges: affiliation fee and operational fee. The affiliation fee is Rs 1,500 per bed for bedded hospitals and Rs 6,000 lumpsum for small clinics, and laboratories. No affiliation fee is charged from government establishments.

Nonetheless, government hospitals are charged a monthly operational cost of Rs 825 and an additional operational fee of Rs 6.1 per bed per day. For private hospitals, the fees are Rs 860 and Rs 6.35.

"In reality it appears from the agreement that the IMA is making an income from this agreement," the GST notice states.

Roundabout path to profits
As the direct receipt of this income into its account could lead to income tax issues, the DGGI says that IMAGE was created to receive these funds. "De facto shell company" is how the DGGI describes IMAGE.

It is also seen that IMAGE in its balance sheet has claimed the properties and other assets of the IMA as its own and, what’s more, is claiming depreciation for the same assets.

Round-tripping of profits has also happened. As per the bylaws of IMAGE, the profits of IMAGE are "donated" to the IMA, taking advantage of its charitable status. "In reality, the IMA is channelling and round-tripping its commercial gains through another self-owned entity in the guise of charitable donations in order to avoid taxability," the show-cause states.

The turnover of this whole operation, with considerable revenue, is not shown in the audited balance sheet or income tax returns of IMA KSB.

"Thus IMAGE appears to be a shell created to divert money directly coming to IMA accounts in order to preserve the mirage of charitable status which would be lost if they directly accumulate business profits," the DGGI says.

Accidental mistake
The GST Intelligence is also not under the impression that the doctors' body had made an unintentional error.

While going through the minutes of the meetings of IMA office-bearers it had come upon remarks that clearly suggested that the IMA was indeed worried about IT officials considering IMAGE activities as IMA's. The DGGI notes that doctors were worried that clubbing IMAGE and IMA turnover could even lead to the financial collapse of the IMA.

The IMA has been given 30 days to respond to the notice.