More than two-thirds of all private hospitals and nursing homes in India do not even file tax returns, let alone pay taxes on their revenue surpluses, according to the latest report of the Comptroller and Auditor General (CAG) of India.

The report made public recently noted that "out of 21,103 private hospitals and nursing homes, as many as 13,963 (66 per cent) private hospitals and nursing homes were not on the records of the Income Tax Department during 2001-02."

Among the reasons for this are: incorrect allowance of inadmissible expenditure, incorrect deduction of capital expenditure, mistakes in allowance of depreciation, and improper computation of rental income from house property, etc. Errors on these four counts alone have resulted in tax evasion of approximately 70 million (one million GBP), the CAG report observed.

This is the second time in less than 12 months that a major government body has pulled up the hospital and healthcare industry in India on the issue of income tax. In November, the Parthasarathi Shome Committee appointed by the Indian Finance Ministry reported that the government would earn something like Rs. 33 billion in additional direct taxes, while the hospitals are saying they need the surplus to upgrade and maintain their hi-tech equipments.

In its section on Charitable Hospitals, the Shome report says, "many non-profit organizations derive all or nearly all of their income from sales of goods or services that they produce." Hence their taxes should be calculated in the same way as any business company.

Hospitals run by charitable trusts in India are exempted from paying income tax on their revenue surplus provided they reserve a certain percentage of their beds and other facilities for economically weaker sections of the society. Most of them have therefore avoided filing their tax returns as well.

From the fiscal year 2002, this will no longer be permitted. During the recent annual budget statement, the Indian Finance Minister, Yashwant Sinha said the tax holiday would continue only if the charitable hospitals file their returns.

But the hospitals are saying they can't afford to pay taxes on their surplus. "Any modern hospital nowadays has to be equipped with facilities for CT san, MRI and so on. How will we maintain all that machinery if we do not generate a surplus?" asks C G Joshi, the honorary secretary of the Association of Hospitals, of which all the top hospitals in Bombay are members.

Besides, much of the equipment needs to be replaced every four or five years, and this would become almost impossible if the government imposes the new taxes, Joshi feels. Other hospital managers echo these feelings. "Soon, we shall degenerate to the level of the government's own hospitals," one of them said.

It is common knowledge in India that the private trust hospitals not only offer much better environs but also attract the best qualified doctors towards them and carry most of the burden of healthcare in the cities. Such hospitals have come up even in small towns like Latur (the venue of the 1993 earthquake) and Jalgaon that have a population of less than one million.

In the metros, even political leaders flock to the private hospitals rather than the nearest medical college hospitals. A few examples will suffice:

? In January 2002, His Holiness Dalai Lama was flown from Patna Medial College to Lilavati Hospital (private trust) in Bombay after he complained of severe abdominal cramps.

? Last year, when the Prime Minister of India needed a knee joint replacement, he went to the Breach Candy Hospital in Bombay instead of the All India Institute of Medical Sciences (AIIMS) in the nation's capital.

? Less than two years ago, Mohan Kumaramagalam, then a Minister in India's Central Government, preferred to get admitted to the Apollo Indraprastha Hospital rather than AIIMS. That he died subsequently is a different issue.

Hence the prospect of these hospitals deterioration to the level of government medical centers is alarming, to say the least.

To an extent, the private hospitals have become a victim of their own success. Major hospitals like Jaslok in Bombay, with 250 to 300 beds collect approximate Rs. 1 million annually. This might now become its taxable income.

Not everyone agrees with the hospital industry's dire financial predictions. A Delhi-based organization called "Worker`s Solidarity" recently brought out a report criticizing the money making tendencies of private trust hospitals. One hospital in Delhi reportedly obtained 15 acres of prime land by paying a lease rent of just Re. 1 per month but failed to meet its commitments to the poorer sections of the city.