New Delhi: The central board of direct taxes (CBDT) on Tuesday issued a circular clarifying specific provisions of the income tax act, which adversely impacts health insurance sector’s third party administrators (TPAs).

The circular said that TPAs, who function as an intermediary between an insurer and a hospital in claim settlements, are liable to deduct tax at source when hospitals are paid. The circular has come in the wake of a case filed in Bombay high court by TPAs following a TDS claim made on them by the tax department. The Bomaby High Court is currently hearing the case.

The essence of the dispute between the TPAs and the tax department is on the scope of TDS provisions of the income tax act. ”We are only facilitators,” Pawan Bhalla, chief executive officer of Raksha TPA Pvt. Ltd and head of the association of TPAs said.

“Consequently, TPAs ought not to be held responsible for TDS,” he said adding: “The CBDT’s interpretation of TDS provision contradicts TPAs’ standpoint. There are 27 registered TPAs in India, who settle about 2.5 million insurance claims.”