Introduction: The GST Debate on Insurance Premiums
The Goods and Services Tax (GST) on health and life insurance premiums is currently 18%, making policies costlier for individuals and businesses. The central government has hinted at the possibility of fully exempting insurance premiums from GST, aiming to boost insurance penetration. However, the insurance industry is pushing for a 12% GST rate instead of full exemption.
Why? Because a 12% GST rate allows insurers to claim input tax credit (ITC), while a complete exemption does not. This blog explores the potential impact of GST exemption, the industry’s reasoning, and the best possible approach.
Current GST Structure on Insurance Premiums
| Type of Insurance | Current GST Rate | Impact on Policyholders |
|---|---|---|
| Health Insurance | 18% | Increases overall cost |
| Life Insurance (Term Plans) | 18% | Higher premium burden |
| Endowment & ULIPs | 4.5% to 18% (varies) | Partial GST relief |
| Group Insurance (Corporate) | 18% | Higher business expenses |
Currently, health and life insurance premiums are taxed at 18%, similar to other financial services. However, endowment policies and ULIPs (Unit Linked Insurance Plans) enjoy lower GST rates on a portion of the premium.
Why is the Government Considering GST Exemption?
A high GST on essential services like insurance discourages people from purchasing adequate coverage. The government’s rationale behind a possible exemption includes:
1. Increasing Insurance Penetration
India has one of the lowest insurance penetration rates compared to developed nations. Removing GST could make policies more affordable and encourage more individuals and businesses to buy insurance.
2. Making Financial Protection More Accessible
Health insurance is a necessity, especially post-pandemic. A GST exemption would significantly reduce policy costs, making insurance accessible to more families.
3. Aligning with Welfare Objectives
Incentivizing insurance aligns with the government’s larger financial inclusion and social security goals. Tax incentives on essential services like healthcare and life insurance encourage broader participation.
Why is the Insurance Industry Pushing for 12% GST Instead of Full Exemption?
Despite the apparent benefits of a zero-GST regime, the insurance industry is advocating for a 12% rate instead. Here’s why:
1. Loss of Input Tax Credit (ITC)
- If insurance premiums are exempt from GST, insurers won’t be able to claim ITC on their operational expenses (such as agent commissions, IT services, and marketing).
- ITC offsets around 11% of costs for insurers. Without it, these costs will likely be passed on to consumers as higher premiums.
2. Possible Increase in Premiums
- With full exemption, insurers would lose tax credits and might increase policy prices to compensate.
- This could neutralize the benefits of removing GST, ultimately making insurance equally or even more expensive.
3. Industry’s Administrative Challenges
- A 12% GST rate ensures that the tax credit system remains intact, simplifying compliance and tax management for insurers.
- A zero-GST rate would require insurers to restructure their pricing models, leading to operational complexities.
4. Global Best Practices
- Most countries with VAT/GST systems offer lower tax rates on insurance rather than full exemptions.
- A moderate GST rate of 12% balances affordability for consumers while keeping business viability intact.
How GST Reduction Would Impact Different Stakeholders?
| Stakeholder | Full Exemption (0% GST) | 12% GST Rate |
|---|---|---|
| Policyholders (Individuals) | Lower upfront premium but risk of hidden costs | Moderate premium with potential cost stability |
| Businesses Offering Group Insurance | Cost reduction but loss of ITC on expenses | Retains ITC benefits, ensuring lower long-term costs |
| Insurance Companies | Loss of ITC, possible price hikes | Can claim ITC, making pricing stable |
Legal & Policy Considerations
1. Legal Precedents and Case Laws
Recent court rulings on GST and financial services taxation indicate that:
- Exemptions without ITC create tax inefficiencies and could increase the hidden cost of services.
- Maintaining a lower tax slab (such as 12%) with ITC is preferable from a compliance and cost-management perspective.
2. GST Council’s Position
- The GST Council has acknowledged the need to reduce rates on insurance but has not reached a final decision.
- Deliberations on the ideal rate (5%, 12%, or 0%) are ongoing, with industry bodies actively lobbying for a balanced approach.
What’s the Best Solution?
While a 0% GST rate sounds beneficial, the loss of input tax credit could backfire by raising premiums indirectly. A 12% rate with ITC retention ensures affordability without disrupting the industry’s financial structure.
A middle path like:
- 5% GST for health insurance
- 12% GST for life insurance (with ITC)
could be a practical compromise.
Conclusion: What’s Next for GST on Insurance?
- The government aims to reduce GST on health & life insurance, but the final decision is yet to be made.
- The insurance industry prefers 12% GST over full exemption due to input tax credit benefits.
- A balanced tax rate (such as 12%) ensures both affordability and business sustainability.
- Policyholders should stay updated on GST changes to make informed financial decisions.