The Indian government is considering reducing or eliminating the Goods and Services Tax (GST) on insurance premiums to make insurance more affordable and increase its penetration. While this move is intended to benefit policyholders, some industry experts are warning that a complete GST waiver could backfire and potentially lead to higher premium costs.
Currently, health and life insurance premiums attract an 18% GST. The proposed reforms, expected around Diwali, suggest a reduction to 5% or even zero. While a complete GST waiver appears beneficial on the surface, the complexities of input tax credit (ITC) come into play.
Insurance companies currently claim input tax credit on the GST they pay on services and supplies. If the GST is completely waived, insurers will not be able to claim this credit. This could increase their operational costs, which they may then pass on to consumers in the form of higher premiums.
Bimal Jain, a GST expert, explains that if the GST is exempted, the ₹11 paid on the purchase or inward supply by the life insurer, for which no credit is received, would become a cost. In this scenario, the total premium payable by term insurance policyholders would increase. Vivek Jalan, Partner, Tax Connect Advisory Services LLP, notes that the eligibility for input tax credit depends on whether the services or goods used are for providing a taxable service. If a service becomes exempt, the right to claim input tax is lost.
Several industry players have pointed out that their input costs are around 6-8%, which they currently balance through the input tax credit. They charge 18% GST from customers, and their total tax liability is reduced due to ITC, which reduces their expenses. However, if the GST is waived and ITC is not available, additional financial pressure will increase on insurance companies.
Narendra Bharindwal, president of the Insurance Brokers Association of India (IBAI), believes that scrapping GST on insurance would reduce premium costs for policyholders, encouraging greater insurance penetration across life, health, and general insurance segments. He added that this move aligns with the national vision of 'insurance for all by 2047'.
A Reuters report indicates that the government is aware of the potential revenue loss of approximately ₹17,000 crore that could result from reducing the GST on insurance. Despite this, the government is keen on making insurance more accessible.
Kunal Varma, Co-Founder and CEO of Freo, suggests that a better approach might be to reduce the GST rate instead of removing it entirely. This way, insurers retain input credit, and consumers still benefit from lower costs. A reduction from 18% to 5% while retaining input tax credit would address concerns about cost escalation due to accumulated input taxes. A 5% GST on insurance strikes a balance between affordability and sustainability, ensuring that insurance companies can maintain their financial health. Furthermore, a nominal GST rate encourages responsible consumption of insurance products, preventing over-insurance or the purchase of unnecessary policies.
The GST Council is reportedly leaning towards a middle-ground approach, considering a reduction in GST rates on health and life insurance premiums to 5% instead of a complete exemption. This approach aims to benefit both policyholders and the insurance industry.
