GST on Insurance is Likely to be Reduced to 5%

The Goods and Services Tax (GST) Council is expected to reduce the tax rates on health & life insurance. The current GST rate on gross premiums is 18%. This rate may be reduced to 5%. Many members of the Group of Ministers (GoM) that have analysed tax rates for health and life insurance are supporting this reduction. One member said that a 5 % GST on Life and health insurance would lessen the burden on policyholders

However, the members of GoM believe that a full tax exemption could lead to higher costs as insurers would be unable to recover the taxes they pay on purchases, these input taxes would build up for them. The insurance industry believes that even a 5% tax could result in the non-utilisation of tax credits. They suggest that a 12% output tax would be more beneficial. The report has been finalized, and the decision is now left to the Council.

The GST council is expected to meet in April or May to discuss this problem considering the report by the Insurance Regulatory and Development Authority of India (IRDAI) on taxation of these insurance premiums.

In the previous month, the insurance industry presented a GST rate of at least 12% on health and life insurance premiums to the IRDAI and the Department of Financial Services (DFS). Additionally, they proposed that insurance companies be allowed to claim the benefit of input tax credit.

The industry stated that the input tax they pay makes up about 8-11% of their costs on term plans, and this amount should be offset by using the Input Tax Credit (ITC). if the tax is declined to 5%, the insurance industry will face a cost disadvantage.

Some experts have suggested that instead of taxing the total premium customers pay, the tax should only be applied to the profits earned by the insurer after paying out claims. However, it seems unlikely that the tax system will be changed in this way.

As per several sources, most members of GoM might not agree to a 12% rate, as it does not give enough relief to policyholders. A complete exemption of term-life insurance from GST will result in a loss of about Rs. 200 crore annually for the government. Additionally, exempting senior citizens’ health insurance premiums would cost the government another Rs. 3,000 crore. Between FY22 and FY24, the total GST collected from health insurance premiums amounted to approximately Rs. 21,000 crore.

As per an expert, exemptions are the worst form of benefit the insurance industry can ask for as they stop the insurer from recovering the input tax credits ITC which can lead to cascading and higher costs. He further stated that a 5% GST rate with ITC is low enough to benefit customers but high enough to allow insurers to recover most of the input taxes they pay on their costs, preventing price increases.

In the past month, the Chairman of the Central Board of Indirect Taxes and Customs (CBIC) pointed out how a complete exemption in health and life insurance premiums could result in higher costs and this would be contrary to what the government wants to do. Under the GST laws, ITC benefit is not available for those goods and services that are exempt from the levy of the GST.

As per another expert, while the government wants to give relief, a complete exemption will not be the best solution. Companies will not be able to claim tax credits and their expenses will go up which will increase the premium prices. By reducing GST to 5%, GoM is considering a more effective solution for the companies to claim ITC.