Ahead of the GST Council meeting next week, the states could not come to a consensus on health insurance premium from Goods and Services Tax (GST). According to a report in Moneycontrol, the Fitment Committee, comprising revenue officials from both the state and Centre, has been trying to reach a consensus on the contentious issue after the issue was taken up many political leaders, including Union Minister of Road Transport and Highways Nitin Gadkari, West Bengal CM Mamata Banerjee, who asked Finance Minister Nirmala Sitharaman to consider a rollback in this segment.
The report stated that a decision in this regard will be taken during the upcoming GST Council meeting to be held in Delhi on September 9.
The Goods and Services Tax (GST) regime was introduced on July 1, 2017, replacing various indirect taxes such as service tax and cess. Currently, the GST rate applied to health and life insurance policies is 18%. This adjustment, which subsumed the previous service tax that was applicable to the insurance sector, has resulted in increased premium costs for policyholders.
Previously, life insurance premiums were subject to a 15% service tax, which included Basic Service Tax, Swachh Bharat cess, and Krishi Kalyan cess. The transition from the 15% service tax to the fixed 18% GST rate has directly impacted policyholders by raising their premium payments.
The removal of the 18% GST on insurance premiums has been a longstanding demand from various stakeholders within the insurance industry. Customers of insurance services have also expressed their desire for the government to eliminate this tax, as it contributes to an unnecessary financial burden on them.
The Fitment Committee has reportedly shown a favourable inclination towards providing relief on life insurance premium. The committee is reportedly engaged in discussions regarding potential relief measures on health insurance premiums as well.
During the 37th meeting of the GST Council, the issue of Goods and Services Tax (GST) on insurance resurfaced. A detailed proposal was presented, receiving backing from the Financial Services Department and IRDAI. The proposal put forth substantial recommendations, including lowering the GST rate on health insurance, term life insurance, and motor third-party insurance premiums from 18% to 5%. Moreover, the proposal advocated for the exemption of GST on annuity purchases made with accumulated pension funds.
GST on health insurance premiums has led to a significant increase in yearly costs. In recent years, there has been a noteworthy surge in GST revenue generated from insurance premiums and renewals. As per the information disclosed in the Lok Sabha in August 2024, the GST collected on insurance premiums escalated from Rs 5,354.28 crore in FY21-22 to Rs 8,262.94 crore in FY23-24 during the past three financial years. Moreover, the GST collected from health reinsurance premiums also saw an increase, rising from Rs 825.95 crore to Rs 1,484.36 crore.
The insurance industry has been actively demanding the removal of this tax, arguing that it significantly increases the cost of insurance coverage for policyholders. The high taxation rate pose a financial burden on policyholders and potentially dissuade individuals from obtaining or increasing their insurance coverage.
The impact on policyholders is significant as insurance is a product that primarily provides benefits to individuals in the event of specific occurrences such as death or hospitalisation. In cases where policyholders diligently pay their premiums and taxes but do not experience the intended benefits, the perceived value of the insurance coverage may be diminished.
Tapan Singhel, MD & CEO, of Bajaj Allianz General Insurance, said: “We have been saying for a while now that reducing the GST rates on health insurance premiums is crucial given the low insurance penetration in India and the essential financial support insurance provides against sudden financial loss. Lowering the GST on health insurance from 18% to 5% would make it more affordable, encouraging more people to purchase it.”