The central government is open to fully exempting health and life insurance premia from the GST, said two persons aware of the development. But the insurance industry, at a meeting with finance ministry officials last week, proposed a 12% as it would allow companies to fully claim credit against GST paid on inputs, the people said, speaking on the condition of anonymity.
Some state ministers, however, are batting for 5%, arguing that would cushion the impact on the exchequer. While a few suggested that insurers should be allowed to set off this liability against the taxes they pay on the services and goods that go into their operations, others did not favour the input tax credit, said the first person cited earlier.
Also read | Govt eyes insurance law revamp: Composite licensing, fair play for PSU insurers
Federal indirect tax body GST Council has sought suggestions on GST reduction from the Insurance Regulatory and Development Authority of India (IRDAI), which is expected to place the industry’s view before it.
“All the proposals are likely to be placed before the GST Council when it meets next, possibly in May or June, and the council will take the final call,” said the first person quoted earlier.
Queries emailed to the finance ministry, GST Council Secretariat and Irdai on Tuesday seeking comments remained unanswered at the time of publishing.
‘12% strikes a balance’
There is a broad agreement between the government and insurers to reduce the GST rate on insurance to 12% with input tax credit, according to an official of the General Insurance Council, which represents public and private general insurers. The industry assured that any tax concession would be passed on to customers by lowering premium charges, said the official.
A reduction in GST on insurance has been a long-pending demand, given India’s low insurance penetration compared to peers. While out-of-pocket spending on healthcare in the country has fallen from about 69% in 2013 to around 50% by 2021, according to World Bank data, it is still higher than large global economies.
Read this | Health insurance for senior citizens: No clarity on implementation of 10% premium hike cap
Sharad Mathur, managing director and chief executive of Universal Sompo General Insurance Co. Ltd., said reducing GST on health insurance and term plans to 12% could boost affordability and demand, especially for essential coverage. “However, a lower rate (5% or full tax exemption) would strip insurers of input tax credit, potentially increasing their costs,” he said. “The 12% rate strikes a balance, offering consumers savings while maintaining insurers’ operational efficiency, ensuring a sustainable market for both.”
Universal Sompo is a joint venture between Indian Bank, Indian Overseas Bank, Karnataka Bank Ltd., Dabur Investment Corp. and Sompo Japan Insurance Inc.
Insurers argue that if a final service is tax exempt or subject to lower taxation than the inputs going into operations, then it becomes challenging to recover that tax cost, which could force businesses to increase the price of the service. This, according to them, distorts the tax system, and a rate cut beyond what is optimal offers no real benefit to the consumer.
Also read | Third-party vehicle insurance: Insurers in distress over three-year rate pause
A reduced GST rate would mean an opportunity for the insurers to provide enhanced customer value with overall pricing, inclusive of GST, becoming more efficient, said Rajeev Chugh, chief financial officer at Future Generali India Life Insurance Co. Ltd. “At the same time, the availability of input tax credits for the insurer would minimise additional cost impact to insurers and, hence, keep it broadly neutral from a cost perspective.”
“The higher uptake expected by customers provides an opportunity for insurers to continue to invest in these product segments and grow the business. It may further help insurers to diversify risks and achieve better operational efficiency, thereby promoting long-term sustainable development,” said Chugh.
Medical inflation
While policymakers are aware of the economic and practical challenges of lowering the tax rate beyond a point, political pressure and public sentiment, especially on sensitive items like health insurance, could influence decision-making to a large extent, said the first person quoted above.
Industry experts say tax is only one of the determinants of health and life insurance products’ affordability.
“A reduction in the GST rates will reduce the cost burden on policyholders, thereby making insurance a more attractive and viable product,” said Pavanjit Singh Dhingra, joint managing director of Prudent Insurance Brokers Pvt. Ltd. “Reduction in premium for health insurance, in particular, is a distinct possibility,” he said, while also flagging the rising cost of medical services.
Also read | Cyclone, quake or landslide? There’s a new insurance product on way.
“The annual increase in medical costs coupled with the increase in claim numbers puts a huge pressure on the profitability of insurers,” said Dhingra, joint managing director of Prudent Insurance Brokers Pvt. Ltd. “Hence, if premiums are to be reduced, the right way will be to control medical inflation, though a reduction in GST rates will certainly be a big positive move.”
