October 22, 2007

VAT RULING NO. 014-07

Revenue Regulations No. 16-2005
Sec. 4.109-1 (B) (1) (g);
VAT Ruling Nos. 359-88 & 104-92;
BIR Ruling No. 023-88

Revenue District Office No. 111

Koronadal City
Attention:

Myrna L. Bernardo
OIC-Revenue District Officer

Gentlemen :
This refers to your letter dated August 15, 2006, which was indorsed by Ms. Rodita B.
Galanto, OIC, Regional Director, Revenue Region No. 18, Cotabato City, requesting clarification
on the following:
1) Whether the issuance of Revenue Regulations No. (RR) 16-2005 1 in relation to
Section 4.109-1 (B) (1) (g) on the sale of drugs and medicines by pharmacies operated by
hospitals or clinics completely overrules the Supreme Court decision in the case of St. Luke's
Medical Center, Inc. vs. Court of Tax Appeals and the Commissioner of Internal Revenue (St.
Luke's Case) on the exemption from value-added tax (VAT) of pharmacy sales to in-patients.
2) Considering that a pharmacy is incidental to the hospital operations of which it is a
source of revenue, is there a need to register separately the pharmacy owned and managed
by hospitals without exceptions? If there are exceptions, what are those relevant issues in
this case?
In your opinion on the sale of drugs/medicines by pharmacies operated by the hospital itself,
there exists an apparent conflict between Section 4.109-1 (B) (1) (g) of RR 16-2005 and the
decision in the case of St. Luke's Case.
In reply, please be informed that Section 4.109-1 (B) (1) (g) of RR 16-2005 provides:
"SEC. 4.109-1.
VAT-Exempt Transactions.
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(B) Exempt transactions.
(1) Subject to the provisions of Subsection (2) hereof, the following transactions shall
be exempt from VAT:
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(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 ."
On the other hand, the decision in the St. Luke's Case, which must be clarified as a Court of
Appeals decision (CA-GR SP No. 45892 March 13, 1998) and not a Supreme Court decision as
erroneously believed, provides:
". . . 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'. A contrary view would derogate from the evident laudable
purpose animating the exemption of 'hospital services'.
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We accordingly opine that the sale of drugs or pharmaceutical items to in-patients of the
hospital should be exempted from VAT because unlike the sale of retailing of drugs or medicines
by drugstores in general, the procurement of medicines and pharmaceutical items from the
hospital drugstore or pharmacy amounts to the availment of service rendered or made available
by the hospital for its in-patients and not simply the buying of such goods." DSETcC
The apparent conflict between RR 16-2005 and the St. Luke's case arises from the plain
language of the regulations which states that if the hospital or clinic operates a pharmacy or drug
store, the sale of drugs and medicine is subject to VAT. However, the St. Luke's case made a
distinction on the sale of drugs or medicine by the hospital/clinic-operated pharmacy or drugstore
to in-patients and pronounced such sale as covered by the broad and general exemption under
hospital services.
The issuance of RR 16-2005 in relation to Section 4.109-1 (B) (1) (g) did not overrule the St.
Luke's case. The Bureau maintains the position that the sale of drugs or medicine to in-patients is
exempt from VAT being considered as hospital services. This stance is consistent with this
Office's views regarding the matter even prior to the St. Luke's decision or RR 16-2005.
It can be recalled that the specific section referred to remains to be substantially the same as
the provisions from where it was lifted, RR 7-95, Section 4.103-1 (1) and subsequently amended
by Section 4 of RR 6-97. Those regulations were already in existence and being implemented by
this Bureau when the St. Luke's case was decided by the Court of Appeals. The interpretation of
such provisions, thus, remains to be undisturbed especially so when the provisions succeeding
and reiterating the original regulations implementing earlier VAT laws substantially remain
unchanged.
Thus, with regard to sale of drugs or medicine by hospitals, a distinction should be made. If
the hospital sells drugs or medicine to in-patients, such sale of drugs or medicine shall form part
of hospital services; hence, exempt from the imposition of VAT. On the other hand, sale by
hospitals of drugs or medicine to out-patients or other customers are not part of hospital services,
and are thus subject to VAT.
As regards the question on registration, if the pharmacy is located outside the hospital
premises or has a juridical personality separate and distinct from that of the hospital, then it is
required to register with the appropriate Revenue District Office like any other person subject to
internal revenue tax pursuant to Section 236 of the National Internal Revenue Code of 1997. On
the other hand, if the pharmacy forms part of the hospital which is already a registered taxpayer, it
will still register as a VAT taxpayer for purposes of sale to out-patients or other customers which
are subject to VAT.

Moreover, the hospital should observe the invoicing guidelines under Revenue Memorandum
Circular No. 62-2005, viz:
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Q13 :
What is the invoicing/receipt requirement of a VAT-registered person?
A13 :
A VAT registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
(2) A VAT official receipt for every lease of goods or properties and for every sale,
barter or exchange of services.
Q14 :
May a VAT registered person issue a single invoice/receipt involving VAT and
Non-VAT transactions?
A14 :
Yes. He may issue a single invoice/receipt involving VAT and Non-VAT
transactions provided that the invoice or receipt shall clearly indicate the breakdown of the
sales price between its taxable, exempt and zero-rated components and the calculation of
the Value Added Tax on each portion of the sale shall be shown on the invoice or receipt.
Q15 :
May a VAT registered person issue separate invoices/receipts involving VAT
and Non-VAT transactions?
A15 :
Yes. A VAT registered person may issue separate invoices/receipts for the
taxable, exempt, and zero-rated component of its sales provided that if the sale is exempt
from value-added tax, the term "VAT-EXEMPT SALE" shall be written or printed prominently
on the invoice or receipt and if the sale is subject to zero percent (0%) VAT, the term "ZERORATED SALE" shall be written or printed prominently on the invoice or receipt. HaTDAE
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Based on the foregoing, a sales invoice is issued for the sale, barter or exchange of goods or
properties, while an official receipt is issued for the lease of goods or properties and for every
sale, barter or exchange of services. However, other options are made available to the taxpayer
such that it may issue a single invoice/receipt involving VAT and non-VAT transactions provided it
complies with the instruction of A14 above; or the taxpayer may issue separate invoices/receipts
involving VAT or non-VAT transactions provided it complies with the requirements of A15 above.
In sum, sale of drugs or medicines to in-patients shall form part of the hospital services which is
issued an official receipt by the hospital itself (and not by the hospital operated pharmacy), while,
the sale of drugs or medicines directly to out-patients or other customers shall be issued a sales
invoice by the hospital operated pharmacy being a sale of goods subject to VAT.

Very truly yours,

(SGD.) GREGORIO V. CABANTAC
Deputy Commissioner
Legal and Inspection Group

Footnotes
1. Consolidated Value-added Tax Regulations of 2005.