In a country without a robust social security net and with rickety government medical infrastructure, the high 18% GST on life and health insurance premiums defies logic.
The pinch is real every time you pay the premium for your life and health insurance policies. The prohibitive 18% Goods and Services Tax (GST) significantly adds to the already high premiums charged by insurers. In a country like India, where insurance penetration is low, this high tax rate discourages people from getting insured or opting for higher coverage.
Despite the government raking in higher GST collections month after month, this over-taxing continues. Union Road Transport and Highways Minister Nitin Gadkari recently highlighted this issue by seeking the elimination of the 18% GST on life and health insurance premiums. In a letter to Finance Minister Nirmala Sitharaman, Gadkari argued that taxing these premiums equates to “taxing life’s uncertainties” and hinders the growth of the insurance sector.
In a country without a robust social security net and with rickety government medical infrastructure, the high 18% GST on life and health insurance premiums defies logic. The GST regime, which came into effect on July 1, 2017, has yet to review these rates despite years of discussions by the GST Council.
Rising GST Collections and the Call for Change
In July 2024, the government’s GST collection stood at Rs 1,82,075 crore, a 10.3% year-on-year increase and the third-highest monthly collection since the GST regime began seven years ago. Nitin Gadkari is not alone in his call for change; the Standing Committee on Finance, headed by Jayant Sinha, also recommended reducing the GST rate on insurance products, especially term and health.
According to a report by the Standing Committee, insurance penetration in India was 4.2% in 2021-22, compared to the global average of 7%. The report highlighted the need to create mass awareness about the benefits of insurance and the diverse products available. The high GST rate results in a high premium burden, which deters people from getting insurance policies.
Rupinderjit Singh, Senior Vice President of ACKO Insurance Company, noted that India’s insurance penetration is only 30%, compared to over 90% in developed countries like the US. This low penetration, combined with high insurance costs, results in high out-of-pocket expenses for medical emergencies. According to the Global Interfaith Council, India has 62% out-of-pocket expenditure compared to 10% in the US, making healthcare a primary reason for families falling back into poverty.
Government’s Justification for 18% GST on Insurance Premiums
The government’s rationale for imposing GST on insurance premiums is to generate revenue. With only 2 crore Indians paying income tax, broadening the tax base is necessary. The GST regime aims to create a uniform tax structure across goods and services, with insurance considered a financial service charged at 18% GST.
Most experts believe that GST rates should be rationalized for different segments, if not eliminated completely. Sandeep Katiyar, Co-Founder and CFO of Finhaat, suggests that taxes on premiums for individuals at the bottom of the economic pyramid or senior citizens should be eliminated. For other income segments, the tax should be lower on pure-term plans and medical insurance premiums.
Despite the government’s tax exemptions under Section 80C for life insurance and Section 80D for health insurance, the exorbitant GST rate remains a significant burden. West Bengal Chief Minister Mamata Banerjee has also demanded a rollback of the GST on life and medical insurance premiums, arguing that it adversely affects people’s ability to meet their basic vital needs.
Declining Insurance Penetration and Rising Premium Collection
The Insurance Regulatory and Development Authority (IRDAI) reported a 2.21% fall in the number of new life insurance policies issued in 2022-23 compared to the previous year. Despite this decline, life insurance premium collection rose by 13% to Rs 7.83 lakh crore in 2022-23. Almost 53% of the premium income in the life insurance industry comes from renewal premiums, while 47% is from new business premiums, indicating fewer people are opting for new insurance covers.
High Premiums and Smaller Coverage
High premiums and the additional 18% GST limit people from opting for higher insurance covers. Many users settle for smaller covers due to high premiums, with premium cost being a crucial factor in selecting a health insurance plan in India. The exemption of GST on health insurance would provide a significant boost, enabling people to obtain sufficient coverage at affordable prices.
Premium payment capacity is directly linked to disposable income, which is limited for the poor and lower-middle-class segments. Lower taxes would allow individuals in these groups to obtain higher coverage.
Conclusion
It is high time for the GST Council to rationalize, if not eliminate, the 18% GST rates on life and health insurance premiums. This move would boost insurance penetration in India and help people secure higher coverage, ultimately leading to a more financially protected population.
Also Read: GSTN Advisory on GSTR-1A: FAQs and Manual on Filing GSTR-1A
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