Reduction In GST Likely To Reduce Health Insurance Premiums! But, Under This Condition Only

FM Nirmala Sitharaman has recently raised hopes when she mentioned that the cost of insurance to the policyholder is expected to reduce if the Goods and Services Tax (GST)  council recommends a reduction in the GST rate on life and health insurance policies. Currently, the GST on life and health insurance premiums is 18 per cent. It is expected to be reduced to five per cent. This should obviously mean a lower premium for policyholders. “ Advocates suggest lowering the GST rate to five per cent or exempting health insurance altogether and introducing additional tax incentives to offset the financial impact and promote wider accessibility,” says Narendra Bharindwal, vice president, the Insurance Brokers Association of India (IBAI). 

But it may not be that simple. Let us take a look. 

“Yes, the cost of health insurance premiums will go down if the GST imposed is reduced because the total premiums include the GST cost,” says Naval Goel, founder and CEO, PolicyX.com, an insurance web aggregator. 

Let’s understand it with a simple illustration. A 30-year-old individual’s base premiums for his health plan with coverage of Rs 7.5 lakh is Rs 10,000 annually. On top of it, GST (18 per cent) is applicable making the total premium cost Rs 11,800. If the GST rate is reduced to five per cent the overall premiums should also be reduced to Rs 10,500. 

However, it is not that simple. “If GST is removed or reduced to five per cent without the input tax credit, insurance companies would incur additional costs,” says Goel. 

Input Tax Credit (ITC) allows businesses to reclaim the GST paid on purchases. For example, if a manufacturer buys raw materials worth Rs 10,000 and pays 18 per cent GST (Rs 1,800), they can claim the Rs 1,800 as ITC, reducing their GST liability when selling the finished product.

“So it’s vital to contemplate the balance between reducing GST and the broader implications for the industry, including the input tax credit benefits insurers presently leverage,” says Sharad Mathur, MD and CEO, Universal Sompo General Insurance. 

So, in case the GST is reduced, the industry would need assurance from the government that insurers will still be able to claim input tax credits on policies sold. If the government does not clarify this, then the insurers will have to bear a cost component and the reduction in GST may not lead to a lowering of premiums for the policyholders.