GST Council Set to Reduce Insurance Tax to 5% with Option of Input Tax Credit

The Goods and Services Tax (GST) Council is set to discuss a sharp cut in GST rates on health and life insurance premiums in its next meeting in June or early July. The proposal seeks to reduce the existing GST rate from 18% to 5%, but with the facility of input tax credit (ITC). This step is being contemplated as one of the wider tax rationalisation steps to enhance affordability and access to insurance products, especially for middle and lower-income families.

The Council will also examine the rate rationalisation report submitted by a Group of Ministers (GoM), led by the Deputy Chief Minister of Bihar, in December 2024. The report suggests important adjustments to current GST slabs and attempts to grant relief in terms of lower rates of tax as well as realignment of the tax structure.

Although the suggestion to cut GST on insurance had been languishing since September 2024, the move was previously delayed due to the need for extensive consultations with all stakeholders and discord among states. However, upon further consideration, the Council is now willing to reconsider the proposal to cut the GST rate on insurance to 5% with ITC under the condition that the benefit of the reduction shall be passed on to policyholders.

Some of the concerns with this proposal are that the insurance firms will not be able to fully avail of the input tax credit since the rate of GST on input services is raised (12% or 18%). This would mean that there will be partial losses for the insurers, and they will then have to incur the cost.

According to industry estimates, cutting GST on insurance to 5%, or preferably zero-rating it, would be a welcome move towards enhancing affordability, especially in the health line, where increased premiums have tightened family purses in the last few years. Tax relief may be a key driver in rendering insurance affordable and putting an end to the practice of financial exclusion in life-critical services like coverage against health.

However, some insurance participants have suggested a 12% GST rate along with the benefits of input tax credit in full. Insurance companies clarified that input taxes account for around 8-11% of the term plan premium. If a 5% tax rate is introduced without the advantage of full ITC, the business expects to be put at a disadvantage.

Though there have been suggestions from some of the states to exempt GST entirely on insurance, this has not been accepted because it is suspected that it will increase the price by eliminating ITC, thus costing the consumer.

In addition to insurance, the GST Council will also consider a report of the Insurance Regulatory and Development Authority of India (IRDAI) on the taxation structure of insurance premiums. In February, the insurance industry submitted proposals to IRDAI and the Department of Financial Services (DFS), suggesting a minimum of 12% GST with ITC on insurance premiums.

In FY22-FY24, the government has received approximately Rs. 21,000 crore worth of GST from health insurance premiums, indicating the industry’s substantial tax contribution.

Aside from insurance, the GoM is also reported to have suggested reducing GST rates on certain consumer goods. They are ready-to-wear garments costing up to Rs. 1,500 (12% to 5%), bottles of packaged drinking water of 20 litres (18% to 5%), bicycles (18% to 5%), and exercise notebooks (12% to 5%).

There are four broad slabs of GST that exist now – 5%, 12%, 18%, and 28%. CBIC is considering the option to merge the 12% and 18% slabs into a single rate of either 14%, 15%, or 16%, with each of these options’ revenue implications worked out in great detail.

The next GST Council meeting will likely be a landmark step towards reorganising indirect taxation in India, with key decisions likely to benefit consumers as well as businesses.