Why Reducing GST to 5% Makes Health Insurance Affordable

Why Reducing GST to 5% Makes Health Insurance Affordable

Affordable health insurance is crucial for every Indian family, but the current 18% GST on premiums is a hurdle. Industry experts propose reducing GST to 5% rather than exempting it entirely. This approach, they argue, balances affordability and sustainability by preserving Input Tax Credit (ITC) benefits.

📊 The Problem with GST Exemption

Krishnan Ramachandran, MD & CEO of Niva Bupa Health Insurance, explained on CNBC-TV18 that a complete GST exemption might seem like a cost-cutting solution. However, it removes insurers’ ability to claim Input Tax Credit (ITC) on their expenses, ultimately raising operational costs.

“Exemption does not serve the objective of bringing down prices because it means we do not get credit for inputs. It increases costs, which is contrary to the purpose of the discussion around GST,” Ramachandran told CNBC-TV18.

🔄 How ITC Works in Health Insurance

Under the current GST system (introduced in 2017), insurers can claim back the tax paid on inputs like:

• Software systems
• Administrative services
• Marketing expenses

If GST is exempted, insurers lose this benefit, increasing their costs. Reducing GST to 5% allows insurers to retain ITC, helping them keep premiums affordable.

🏢 The Impact on Affordability

Lowering GST to 5% directly reduces the cost for policyholders. For example:

Such savings make health insurance more accessible, especially for middle-class and rural families.

👩‍💼 Expert Opinions on Reducing GST to 5%

Rajesh Kumar, Founder of Square Insurance, highlighted the challenges faced by insurers in rural areas:

“Without the benefit of ITC, insurers will face higher operational costs, making premiums less affordable. This is critical as rural health insurance coverage is already lower than urban areas.”

🔝 Government’s Next Steps

Finance Minister Nirmala Sitharaman recently announced the formation of a Group of Ministers (GoM) to review GST rates for health and life insurance. If the GoM recommends reducing GST to 5%, premiums could drop significantly.

🔧 Why Reducing GST to 5% is the Better Solution

1. Preserves ITC Benefits: Insurers can claim back taxes on their inputs.
2. Reduces Premium Costs: Direct savings for policyholders.
3. Simplicity: Easier execution for insurers.
4. Sustainability: Supports long-term industry growth.

Conclusion

Reducing GST to 5% on health insurance premiums is a practical and sustainable solution. It balances affordability for policyholders while ensuring insurers can manage operational costs effectively. Complete exemption might seem attractive, but the loss of ITC could lead to higher premiums in the long run.

As the GST Council considers rate changes, keeping ITC in mind is essential for ensuring health insurance remains within reach for all Indians.