According to industry experts, even at five per cent, insurers may struggle to utilize tax credits, and they are advocating for a 12 per cent output tax liability
According to recent media reports, the Goods and Services Tax (GST) Council is likely to reduce the tax rate on health and life insurance premiums rather than granting a full exemption. The rate is likely to fall to five per cent, from 18 per cent tax at present on gross premiums, while retaining the input tax credit (ITC) facility.
The majority of the members of the Group of Ministers (GoM), who reviewed the tax structure for insurance, stand by the tax cut, but believe that a full exemption could lead to increased costs on the back of the accumulation of input taxes. According to industry experts, even at five per cent, insurers may struggle to utilize tax credits, and they are advocating for a 12 per cent output tax liability.
A GoM member told media: “We are not in favour of completely exempting life and health insurance premia from GST, but wish to reduce the rates. We have finalised our report… now it’s up to the Council to decide.” Yet another member said: A five per cent GST on life and health insurance premiums would reduce the burden on policyholders.”
Some experts have suggested that a kind of restructuring, like aligning the tax base with the concept of value-added tax, is quite unlikely.
Also, the GST on insurance premiums should be set at a minimum of 12 per cent, with ITC benefits for insurers, the insurance industry proposed to the Insurance Regulatory and Development Authority of India (Irdai) and the Department of Financial Services (DFS) in February. They also put forth their argument that tax payments should be offset through ITC and that the input tax payments account for eight to 11 per cent of costs on term plans. They warned that a reduction of five per cent would put the industry at a cost advantage.
Earlier this year, Sanjay Kumar, the chairman of the Central Board of Indirect Taxes and Customs (CBIC), told the media that a complete exemption on insurance premiums could result in higher costs, which contradicts the government’s objective.
According to sources, the majority of the GoM members might not accept the 12 per cent rate because it does not offer sufficient relief to policyholders. A source familiar with the matter said: “The government wants to give relief, but a complete GST exemption is not the best solution. If insurance is fully exempted, companies won’t be able to claim tax credits, which could actually increase their expenses and, in turn, premium prices.” Also, he added: “The GoM is considering a better solution—reducing GST to five per cent while allowing companies to claim ITC.”
In fact, a full exemption of term-life insurance from GST would cost the exchequer around Rs 200 crore annually, according to sources. On the other hand, exempting senior citizens’ health insurance premiums would cost an additional Rs 3000 crore. The government collected around Rs 21,000 crore in GST from health insurance premiums between FY22 and FY24.
Buy Outlook Money March 2025 Magazine Issue on Amazon Here.