GST on Insurance: A Necessary Burden or a Scope for Relief?
The Central Government is re-evaluating a proposal to exempt GST on certain insurance policies, particularly pure term life insurance and health insurance for senior citizens. While the move is aimed at making insurance more affordable, concerns remain about its impact on insurers and policyholders.
At present, insurance premiums attract 18% GST, making them costly for many individuals. A Group of Ministers (GoM) has proposed lowering GST to 5% for health insurance policies while exempting term insurance for families and senior citizens. However, a complete GST exemption could lead to higher insurance premiums, which runs counter to the government’s goal of promoting affordability.
Why is a Full GST Exemption Controversial?
The Central Board of Indirect Taxes and Customs (CBIC) argues that a full exemption would remove Input Tax Credit (ITC) benefits for insurers. This means:
✅ Insurers will lose tax credits on their expenses, increasing their costs.
✅ These higher costs will likely be passed on to policyholders in the form of increased premiums.
✅ This could lead to reduced affordability and lower insurance penetration in India.
According to CBIC Chairman Sanjay Kumar Agarwal, while the government aims to provide relief, it also wants to avoid unintended cost hikes for policyholders.
Potential GST Rate Cuts and Impact
Current GST Rates on Insurance Policies:
| Insurance Type | Current GST Rate | Proposed GST Rate |
|---|---|---|
| Health Insurance | 18% | 5% (without ITC) |
| Term Life Insurance | 18% | 0% (Full Exemption) |
Estimated Revenue Loss to the Government:
- Exempting Term Life Insurance – ₹200 crore annually.
- Exempting Senior Citizen Health Insurance – ₹3,000 crore annually.
While lowering GST rates may boost insurance adoption, the government must balance revenue concerns with consumer benefits.
Legal and Economic Considerations
1️⃣ Insurance as a Necessity, Not a Luxury: The Supreme Court in past rulings has noted that insurance is a fundamental financial security tool. Given its significance, experts argue that lower taxes could improve penetration in India, where insurance coverage remains low.
2️⃣ Revenue vs. Relief: The GST Council must weigh tax revenue losses against the potential benefits of increased insurance adoption. Lower premiums might attract more policyholders, offsetting revenue losses through a broader tax base.
3️⃣ Balancing ITC and Affordability: A 5% GST rate (without ITC) for health insurance ensures some relief without the unintended consequence of higher costs due to ITC loss.
What Happens Next?
The GST Council is set to review the GoM’s recommendations in its next meeting. While a full GST exemption is unlikely, the government may agree to:
✅ Reduce GST on health insurance to 5%.
✅ Offer partial relief for senior citizens.
✅ Ensure insurance remains affordable while keeping insurer costs in check.
Final Thoughts
The government is keen on making insurance more affordable, but the complete removal of GST might backfire. Instead, a reduction in tax rates could provide a balanced solution that benefits both policyholders and insurers.
The next GST Council meeting will be crucial in determining how India’s insurance taxation will evolve in the coming years.