GST Council may provide Relief on Life Insurance Premium

The GST Council is likely to discuss providing relief for life insurance premiums. Currently, insurance premiums attract up to 18% GST.

It is reported that the Fitment Committee (a committee of officers from the Centre and States) has favoured relief in life insurance premiums, while discussions are underway to reduce healthcare premiums. The Committee investigates representations regarding rate revisions for goods and services, conducts preliminary research, and ultimately makes recommendations to the GST Council. As a result, the GST Council considers each particular issue and makes final recommendations, which are then adopted by the Centre, States, and Union Territories.

In the past, the Committee ignored representations for rate revision on three times, citing the fact that there was a standard rate prior to the GST regime and that reduction or exemption could distort the tax structure. According to the agenda item for the 31st GST Council meeting (December 22, 2018), a request to reduce the tax rate from 18% on insurance services was presented to the Committee. Another idea involved cutting the GST on health insurance from 18% to 5%. However, the Committee did not approve either of these two proposals.

During the consideration of the first proposal, the Committee noted that “exemption would result in ITC reversals and would increase the compliance burden on the part of the insurance company.” Exemption of output services will result in ITC blockage and increase the cost of output services to consumers.”

The issue of GST on insurance arose again before the GST Council’s 37th meeting, when a detailed plan was presented. The proposal was presented to the GST Council, with references from the Financial Services Department and the IRDA. This included cutting the GST rate from 18% to 5% on health insurance, term life insurance, motor vehicle third-party insurance premiums, and exempting the purchase of annuities from an accumulated pension amount.

The Committee advised that they may not be accepted in order to cut GST on insurance services from current rates. Furthermore, it stated that GST collection from financial and other related services such as insurance and pensions exceeds Rs.1.24 lakh crore (Rs.72,012 crore in cash and Rs.52,150 crore in credit). Prior to GST, the insurance business was subject to a 15% service tax. As a result, lowering GST from 18% to 5% would result in significant revenue losses for the government. However, it stated that the plans may be reconsidered once the revenue condition improves.

The agenda note for the 47th GST Council (June 28-29, 2022) included one more proposal for the Fitment Committee regarding the abolition of GST on life and health insurance.

Following review, the Committee stated, “This is a new exemption request. Exemption/lowering of the GST rate will result in the cascading of input taxes, distorting the tax system. No change is recommended.”

During the same meeting, the Committee discussed another proposal to exempt GST on premiums due on group insurance policies for senior citizens and to reduce GST on health insurance premiums for senior citizens, but decided that it should not be adopted.