Why Lowering GST Alone May Not Cut Insurance Premiums

Introduction: Will GST Cuts Make Insurance Affordable?

Reducing GST rates on health and life insurance policies is a much-discussed move that could potentially ease financial burdens on policyholders. However, many industry experts argue that slashing GST alone won’t resolve affordability issues unless insurers are allowed Input Tax Credit (ITC) benefits. Without ITC, operational costs for insurers rise, keeping premiums high and impacting the reach of affordable insurance.

Key Factors Affecting Insurance Premiums

1. Lack of Input Tax Credit (ITC):
   Under the current GST framework, insurers cannot claim ITC on services consumed. This means higher operational costs that are ultimately passed on to policyholders, reducing the affordability of premiums. For instance, rural health insurance penetration is already alarmingly low—14.1% in rural areas compared to 18% in urban regions.
2. Impact on Rural Areas:
   The lack of ITC disproportionately affects rural areas, where affordable health coverage is critical. Despite government-backed schemes performing slightly better in rural India (13.1% penetration versus 12% in urban), the private sector’s role in bridging the gap becomes harder without reduced operational costs.
3. Fiscal Considerations:
   The insurance sector contributed over ₹16,000 crore to GST revenues in FY 2023-24. Any reduction in GST rates must balance public expectations with fiscal needs. A blanket reduction without ITC eligibility might not translate to meaningful premium reductions, limiting its effectiveness.
4. Historical Context:
   When the GST regime was introduced in 2017, insurers benefitted from ITC, which helped maintain competitive premiums. Reviving this provision could once again make insurance more accessible for all.

Case Laws and Recent Developments

The GST Council has proposed forming a Group of Ministers (GoM) to review GST rates on life and health insurance comprehensively. If implemented thoughtfully, recommendations from the GoM could address critical issues, such as ITC benefits, ensuring that any GST rate reduction achieves its intended impact.

Additionally, courts like the Madhya Pradesh High Court have emphasized clarity in GST policy implementation to avoid undue financial strain on businesses. Such rulings highlight the importance of holistic reforms over piecemeal changes.

Solutions for Affordable Insurance

1. Restore ITC Benefits:
   Allowing insurers to claim ITC on consumed services would offset operational costs, directly benefiting policyholders with lower premiums.
2. Targeted GST Adjustments:
   Reducing GST rates combined with ITC could balance affordability and fiscal sustainability.
3. Incentivize Rural Coverage:
   Special provisions or lower tax rates for insurers focusing on rural penetration could address glaring inequalities in health coverage.
4. Public-Private Partnerships:
   Encouraging collaborations between the government and private insurers may bridge the affordability gap while enhancing coverage quality.

Balancing Act: What’s at Stake?

The GST Council must strike a delicate balance between addressing public expectations and maintaining fiscal responsibility. Experts like Rajesh Kumar and Trivesh D emphasize that while GST cuts are a step forward, they must be accompanied by ITC benefits and broader policy changes to ensure long-term affordability and sustainability.

Final Thoughts

A GST rate cut on health and life insurance might provide temporary relief but fails to address systemic issues like operational costs and rural accessibility. For lasting change, reforms must go beyond GST rates, reinstating ITC benefits and incentivizing rural penetration.