The GST Council is reportedly leaning towards a middle-ground approach rather than a complete waiver for health and life insurance policies. At present, health and life insurance gross premiums attract 18% GST, and this is expected to be brought down to 5%, FE reported, citing sources.
This reduction, rather than a complete waiver in GST on gross insurance premiums, will be beneficial for both policyholders as well as the insurance industry. A complete GST exemption would see input tax credit accumulating for the insurers, as a result insurance costs would go up for consumers, say experts.
A reduction from 18% to 5% while retaining input tax credit would address concerns about cost escalation due to accumulated input taxes, they said.
An tax expert said, “At first glance, a full GST waiver on health and life insurance may seem like a big win for consumers, but it’s important to look at the bigger picture. Currently, insurers can claim input tax credit, which helps offset their GST expenses on services and supplies. If that benefit goes away due to a full exemption, insurers could see their costs go up, and those costs may eventually be passed on to the end consumer through higher premiums.”
So while a waiver intends to make insurance more affordable, without careful structuring, it could end up having the opposite effect in the long run, he said adding that “a better approach might be to reduce the GST rate instead of removing it entirely — that way, insurers retain input credit and consumers still benefit from lower costs.”
GST relief on life and health insurance: What’s the insurance industry take on this proposal
The insurance industry appears divided on the matter. While some stakeholders support a lower 5% GST, others argue that this rate might still lead to unused tax credits, making a 12% output tax liability a more practical alternative. The final decision will likely weigh the trade-offs between affordability for policyholders and financial viability for insurers.
It remains to be seen how the GST Council balances these competing interests in its upcoming deliberations. The GST Council is expected to meet next month to discuss several important issues, including the proposal to reduce tax on health and life insurance premium.
The demand to reduce or remove 18% GST on life and health insurance policies is constantly increasing. The GST Council has taken the matter up for discussion in recent meetings, but no final decision has been taken so far. It is likely that the matter will be raised again in the GST Council meeting to be held next month. But the big question is whether there is any real possibility of reduction in GST, and even if it happens, will it give any concrete benefit to insurance policyholders?
Difficult decision for the government
GST on insurance policies is a major revenue source for the government. According to the data presented in the Lok Sabha, in the financial year 2023-24, the government collected GST of more than Rs 16,000 crore from health and life insurance policies. It will not be easy for the government to give up such a huge revenue. At the same time, the general public is demanding a cut in the GST rate, but looking at the new financial figures, it will not be easy for the government to take this decision.
Insurance companies’ concerns
Insurance companies are also confused about this matter. Their question is that if the government reduces the GST rate, will they continue to get the benefit of input tax credit (ITC)? If the government does not provide this facility, the cost of insurance companies will increase and the premium may increase instead of a reduction.
Insurance companies say that their input cost is 6-8%, which they currently balance through input tax credit. Currently, they charge 18% GST from customers and their total tax liability is reduced due to ITC, which reduces their expenses. But if GST is waived and ITC is not available, then additional financial pressure will increase on insurance companies.
This will have a direct impact on customers — despite the low GST rate, there will be no significant reduction in insurance premium, rather it may also become expensive. That is, without a proper framework, the purpose of reducing GST will not be achieved.
