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Debate Over Goods and Services Tax (GST) on Health Insurance
Context:
- Insurance companies increased premiums for health and life insurance policies this year with some policies experiencing up to a 50% rise.
- Combined with 18% GST, this has made insurance less affordable for many people in the country.
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- Insurance companies’ significant premium increases, raised concerns, indicating plans to address the issue through further actions.
- Earlier, the Minister of Road Transport and Highways criticised the GST on insurance, stating it amounts to taxing the “uncertainties of life” and hinders industry growth.
- He urged the Finance Minister to consider withdrawing this tax, noting that it disproportionately affects senior citizens and those seeking essential coverage.
GST and Health and Life Insurance:
- GST was introduced on July 1, 2017, replacing various indirect taxes, including a 15% service tax on insurance.
- The current GST rate of 18% applies to all health and life insurance policies, increasing the cost for policyholders. For example, a health insurance premium of ₹11,000 now incurs a GST of ₹1,980, leading to a total premium of ₹12,980, compared to ₹12,650 before GST implementation.
- Impact on Affordability: Rising costs of health insurance, exacerbated by medical inflation (estimated at 14% last year), made it difficult for many to afford coverage.
- The Parliamentary Standing Committee on Finance recommended reconsidering the high GST rates, particularly for senior citizens and microinsurance policies, to make insurance more accessible.
Justification for Imposing Tax:
- Imposing GST on insurance premiums serves as a significant revenue source for the government. In the last 3 financial years, it generated ₹21,256 crore, along with an additional ₹3,274 crore from reissuance of health policies, crucial for funding various government initiatives and services.
- Policyholders can benefit from tax deductions under Sections 80C and 80D of the Income Tax Act, 1961.
- These deductions allow individuals to claim up to ₹1.5 lakh on overall insurance premiums, which include the applicable GST.
- This framework aims to mitigate the tax burden on policyholders while encouraging insurance uptake.
- Insurance companies argue that rise in retail inflation, particularly in medical costs, necessitates higher premiums.
- GST is a means to ensure that insurance remains a viable business despite these increasing costs.
Arguments for Withdrawal of GST:
- The high GST rate deters individuals from purchasing insurance, affecting overall coverage rates.
- The health insurance premiums have nearly doubled over the past five years, leading to a decline in the number of policies issued and lives covered.
- Despite growth in the segment, the penetration remains low.
- This undermines the goal of “Insurance for All by 2047” set by the Insurance Regulatory and Development Authority of India (IRDAI).
- The Confederation of General Insurance Agents’ Associations of India highlighted that India has one of the highest GST rates on insurance globally. It urged the government to reduce the GST on individual health insurance policies from 18% to 5%.
Market Dynamics:
- The general insurance sector collected ₹1,09,000 crore in premiums for health insurance in FY 2023-24.
- Life insurance premiums reached ₹3,77,960 crore.
- Economic Survey 2023-24 notes that health insurance premiums made up about 35% of total premiums in FY23 and grew by 11%.
- It stated that while lower-income groups may face price and income constraints, the expanding middle class and increased discretionary spending are expected to drive overall growth.
- Despite this, insurance penetration remains low, with a decline from 3.2% to 3% in the life insurance sector.
- This indicates a need for policy reforms to enhance affordability and accessibility.
- As per the IRDAI, India will be the sixth-largest insurance market within a decade, leapfrogging Germany, Canada, Italy and South Korea.
International Practices:
- In countries like Singapore and Hong Kong, there is no Goods and Services Tax (GST) or Value Added Tax (VAT) applied to insurance policies. This absence of taxation makes insurance more accessible and affordable for consumers in these regions.
- In contrast, high GST on insurance in India, acts as a financial barrier, discouraging individuals from purchasing insurance policies due to increased overall cost.