GST (Goods and Services Tax) on health and life insurance in India is a topic that affects many people but isn’t always fully understood. When someone buys a health or life insurance policy, they not only pay for the coverage but also an additional GST charge. This tax is added to the premium, making the overall cost of insurance higher. While GST helps the government collect revenue, it can also make essential insurance products more expensive for individuals and families, impacting their financial planning and access to necessary protection. Understanding how GST affects insurance costs is important for making informed decisions about coverage.
Tags: GS- 2, Health — Welfare Schemes – Issues Relating to Development, GS- 3, Fiscal Policy
For Prelims: National Health Policy (NHP), Ayushman Bharat PMJAY, Insurance Regulatory and Development Authority of India, Health Insurance, Goods and Services Tax (GST)
For Mains: GST on Health and Life Insurance in India, India Health Infrastructure- Challenges and Way Forward.
Context:
- Recent discussions have intensified regarding the Goods and Services Tax (GST) imposed on health and life insurance premiums.
- Opposition leaders have protested against the 18% GST on insurance premiums, arguing that it exacerbates the rising cost of premiums and makes insurance less affordable for many citizens.
What is the GST on Health and Life Insurance Premiums?
- GST Implementation and Current Rate:
- Introduction: GST (Goods and Services Tax) replaced various indirect taxes, including service tax and cess, on July 1, 2017.
- Current Rate: The GST on health and life insurance premiums is fixed at 18%. This rate reflects the broader tax framework under GST, which includes the former service tax applicable to insurance.
- Previous Tax Structure: Prior to GST, life insurance premiums were subject to a 15% service tax. This included Basic Service Tax (12%), Swachh Bharat cess (0.5%), and Krishi Kalyan cess (0.5%).
- Impact on Premiums: The increase from 15% to 18% GST has led to higher premiums for policyholders, impacting the affordability of insurance.
- Impact of Medical Inflation:
- Medical Inflation Rate: Medical inflation was estimated to be around 14% towards the end of the previous year, contributing to the rising costs of treatment.
- Effect on Insurance: The combination of increased GST and high medical inflation has made both health and life insurance more expensive, making it challenging for many to afford coverage.
- Government Acknowledgement and Representations:
- Parliamentary Acknowledgment: The government has acknowledged in Parliament the representations received requesting an exemption or reduction in the GST rate on life and health insurance premiums.
What is the Rational Justification for Imposing the Tax?
- GST Council Recommendations:
- Council Role: GST rates and exemptions, including those on health insurance premiums, are determined based on the recommendations of the GST Council. This constitutional body consists of the Union Finance Minister and state/UT finance ministers.
- Tax Application: GST applies to all insurance policies as insurance is classified as a service under GST.
- Revenue Generation:
- Revenue Figures: GST on insurance has generated ₹21,256 crore in the last three financial years and an additional ₹3,274 crore from health policy reissuances.
- Tax Benefits: Insurance premiums qualify for deductions under Sections 80C and 80D of the Income Tax Act, 1961, allowing customers to claim deductions up to ₹1.5 lakh, including GST.
- Sectoral Concerns:
- Cost Impact: Insurance companies argue that rising retail and medical inflation, which is higher than general inflation (5.08% in June), increases their overall costs.
- Benefit Pass-Through: There are concerns about whether reducing GST would translate into lower premiums for consumers, as insurers might not pass on the benefit.
Argument for Withdrawing or Reducing GST on Premiums
Premium Increases:
- Recent Hikes: The premium for health insurance policies has surged by up to 50% this year. This significant increase has led to a decline in policy renewals.
- Affordability Issue: Frequent premium hikes and high medical inflation are making insurance less affordable, affecting coverage renewal rates.
Global Comparison and Recommendations:
- Global Rates: The GST on insurance in India is among the highest globally. Countries like Singapore and Hong Kong do not impose GST or VAT on insurance.
Committee Recommendations:
- The Standing Committee on Finance’s 66th report, endorsed by the Parliament, recommended rationalising GST rates on insurance products.
- The aim is to make insurance more affordable and align with the IRDAI’s goal of “Insurance for All by 2047”.
Industry Perspective:
- Insurer Opinions:
- Private sector insurers argue that the high GST rate makes insurance products difficult to sell, especially when compared to markets with no GST or VAT on insurance.
- They advocate for a reduction in GST to improve market accessibility and affordability.
How Big Are the Markets for Life and Health Insurance in India?
- Health Insurance Market:
- Premium Collection: In fiscal year 2023-24, the general insurance industry collected ₹1,09,000 crore in premiums under the health insurance portfolio.
- State Contributions: In 2022-23, five states—Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Delhi—accounted for approximately 64% of the total health insurance premium. The remaining 36% was contributed by all other states combined.
- Life Insurance Market:
- Premium Mobilisation: Life insurance companies raised ₹3,77,960 crore in premiums during FY2024. Among these, the Life Insurance Corporation of India (LIC) alone contributed ₹2,22,522 crore.
- Insurance Penetration:
- Life Insurance Sector: According to a Swiss Re Sigma report, insurance penetration in India’s life insurance sector declined from 3.2% in 2021-22 to 3% in 2022-23.
- Non-Life Insurance Sector: The penetration rate in the non-life insurance sector remained stagnant at 1% during the same period.
- Overall Penetration: As a result, India’s overall insurance penetration dropped to 4% in 2022-23 from 4.2% in 2021-22.
- Affordability Concerns:
- Public Sentiment: This is aligned with the ambitious goal of achieving “Insurance for All by 2047,” as highlighted by industry experts and stakeholders.
Downsides of Removing GST on Life and Health Insurance
- Revenue Loss for Governments:
- Impact: Removing the 18% GST on insurance premiums would lead to significant revenue loss for federal and state governments, potentially causing budget deficits and impacting funding for public health services.
- Increased Burden on Other Taxpayers:
- Compensation: Governments might raise other taxes to compensate for the lost GST revenue, increasing the financial burden on taxpayers.
- Potential for Increased Prices:
- Cost Impact: Eliminating GST might not lower overall costs if healthcare providers increase prices to offset revenue losses, thus negating the benefits for consumers.
Way Forward:
- GST Review:
- Adjustment Consideration: The government should review and potentially adjust the GST on health and life insurance premiums to improve affordability and policy uptake.
- Capital Support to Insurance Sector:
- ‘On-Tap Bonds’: The Reserve Bank of India could issue ‘on-tap’ bonds to meet the insurance sector’s estimated capital needs of ₹40,000-50,000 crore, offering flexible funding options.
- Increased Public Investments in Healthcare:
- Enhanced Utilisation: Higher public investment in healthcare can increase service utilisation and affordability, meeting latent demand and improving access.
- Investments in More Medical Colleges:
- Expanding Capacity: Investing in additional medical colleges can help reduce costs and enhance the quality of healthcare services beyond leading institutions like AIIMS.
- Policy Reforms:
- Controlling Costs: Implementing reforms to reduce medical inflation and offering incentives to insurers can make health insurance more affordable and encourage competition and innovation.
UPSC Civil Services Examination, Previous Year Questions (PYQs)
Mains:
Q:1 “Besides being a moral imperative of a Welfare State, primary health structure is a necessary precondition for sustainable development.” Analyse. (2021)
FAQs
Q: What is GST and how does it apply to health and life insurance in India?
- Answer: GST, or Goods and Services Tax, is a tax levied on most goods and services in India. For health and life insurance, GST is applied to the premiums you pay for these policies. This means that a certain percentage of the premium amount goes towards GST.
Q: How much GST is charged on health and life insurance premiums?
- Answer: Currently, a GST rate of 18% is applied to health and life insurance premiums in India. This percentage is added to the cost of your premium, making the total amount you pay slightly higher.
Q: Why is GST charged on insurance premiums?
- Answer: GST is charged on insurance premiums because insurance services are considered a form of service under the GST law. Just like other services, they are subject to taxation to contribute to the government’s revenue.
Q: Does GST affect the benefits of my health or life insurance policy?
- Answer: No, GST does not affect the benefits of your health or life insurance policy. It only affects the cost of your premium. The coverage and benefits you receive from your policy remain the same.
Q: Can I claim tax benefits on the GST paid for health and life insurance?
- Answer: Yes, you can claim tax benefits on the premiums you pay, including the GST portion, under Section 80D of the Income Tax Act for health insurance and Section 80C for life insurance. This can help reduce your overall taxable income.
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