The debate over GST on health insurance

Insurance companies have jacked up premiums on health and life insurance policies this year which, together with the 18% Goods and Services Tax (GST), has made insurance less affordable for many sections of the country’s population.Opposition leaders including Leader of Opposition in Lok Sabha Rahul Gandhi protested at Parliament’s Makar Dwar on Tuesday, demanding the withdrawal of GST on life insurance and health insurance premiums. Trinamool Congress MP Derek O’Brien had raised the issue in Rajya Sabha on Monday, and his party chief Mamata Banerjee had threatened to “hit the streets” last week to protest against the “antipeople” tax.Earlier on July 28, Union Minister of Road Transport and Highways Nitin Gadkari wrote to Finance Minister Nirmala Sitharaman, saying GST on life and medical insurance premiums amounted to taxing the “uncertainties of life”. The tax was also “restricting the growth of the industry”, Gadkari said.

What is the GST on health and life insurance premiums?

GST replaced all indirect taxes like service tax and cess from July 1, 2017. Currently, GST on health and life insurance policies is fixed at 18%. Since GST encapsulates service tax, which applies to the insurance industry, its introduction has resulted in an increase in premium amounts. Prior to GST, life insurance premiums were subject to 15% service taxes, comprising Basic Service Tax, Swachh Bharat cess, and Krishi Kalyan cess. The increase from 15% to 18% impacted the end consumer — that is, policyholders — by raising their premiums amountsThis, along with the runaway cost of treatment — medical inflation was estimated to be 14% towards the end of last year — has made buying medical insurance difficult for many people. Ditto is the case with term insurance policies. The government acknowledged in Parliament on Monday that representations had been received asking for an exemption or reduction in the rate of GST on life and health insurance.

What is the rational justification for imposing the tax?

GST rates and exemptions on all services, including GST on health insurance premium, are prescribed on the recommendations of the GST Council, which is a constitutional body comprising the Union Finance Minister and ministers nominated by governments of states/ Union Territories. GST is applicable to all insurance policies since insurance is a service, and policyholders pay tax on their insurance premium. It’s a revenue earning segment for the government, which fetched Rs 21,256 crore in GST during the last three financial years, and another Rs 3,274 crore from the reissuance of health policies. Insurance policies allow certain deductions while computing income tax. The most popular taxsaving deductions, particularly on life insurance premiums, are Sections 80C and 80D of the Income Tax Act, 1961. Under Section 80C, a customer can avail deductions of up to Rs 1.5 lakh on the overall insurance premium, including the GST applicable on them. If customers opt for a medical rider with their life insurance policies, Section 80D provides for additional deductions on the premium.Sceptics doubt whether reducing GST, should the government agree to do it, will help policyholders. “It remains to be seen whether insurers will pass on the benefit to customers,” said an observer of the insurance sector. Insurance companies say the rise in retail inflation has added to their overall costs. Medical inflation is much higher than retail inflation (5.08% in June this year), they point out. 

And what is the argument for withdrawing the GST on the premium?

The main issue is the large increases in premium on health insurance policies this year — a leading public sector insurer has hiked the premium by 50%. While health insurance is very significant for the benefit of the people, “sadly, the renewal rate of policies is alarmingly declining due to frequent premium hikes and medical inflation”, the Confederation of General Insurance Agents’ Associations of India, an umbrella body of non-life insurance agents, has said. The confederation has pointed out that the GST on insurance in India is the highest in the world — and that the situation needs to be addressed in order to attain insurance regulator IRDAI’s goal of “Insurance for All by 2047”, which was endorsed by the Standing Committee on Finance in its 66th report submitted to Parliament in February 2024. This report had recommended rationalisation of the GST rate on insurance products, especially health and term insurance. The high rate of GST results in a high premium burden, which acts as a deterrent to getting insurance policies, it had said.

How big are the markets for life and health insurance in the country?

The general insurance industry collected Rs 1,09,000 crore premium under the health portfolio in fiscal 2023-24. Life insurance companies mobilised Rs 3,77,960 crore premium from customers in FY2024, with LIC alone accounting for Rs 2,22,522 crore. Just five states — Maharashtra, Karnataka, Tamil Nadu, Gujarat and Delhi — contributed about 64% of the total health insurance premium in 2022-23; all other states together contributed the remaining 36%. According to a Swiss Re Sigma report, insurance penetration in India’s life insurance sector reduced from 3.2% in 2021-22 to 3% in 2022-23, and remained stagnant at 1% in the non-life insurance sector. As such, India’s overall insurance penetration reduced to 4% in 2022-23 from 4.2% in 2021-22.