Eliminating GST On Term And Health Insurance: A Financial Boon?

As the debate around the affordability of term and health insurance gains momentum, the recent Lok Sabha deliberations on reducing or eliminating GST on these essential insurance products bring this issue into sharp focus. Thiru Dayanidhi Maran, a member of the Loksabha, starred question in Parliament on December 2, 2024, and Finance Minister Nirmala Sitharaman's response highlighted the nuances of this critical subject, according to a recent circular by the Ministry of Finance. 

Sitharaman, responding to the Lok Sabha starred question on December 2, 2024, clarified that GST rates and exemptions on services, including term and health insurance, are decided by the GST Council, which includes members from the Union and State/UT Governments. She informed that the 54th GST Council meeting deliberated on this issue and constituted a Group of Ministers (GoM) under Bihar Deputy CM Sh. Samrat Chaudhary to holistically review GST on life and health insurance.

The Minister stated that the revenue impact of GST reduction cannot be projected until specific rate recommendations are made. She assured that in a competitive insurance market, GST rate reductions are expected to directly benefit policyholders by lowering insurance costs. The Insurance Regulatory and Development Authority of India’s  (Irdai) existing regulatory framework oversees insurance product design and pricing, ensuring transparency. Sitharaman also noted that a potential GST reduction would reduce costs for policyholders, making healthcare more affordable and equitable, pending the GoM’s final recommendations.

Here's what you need to know about the implications of such a move and its impact on policyholders and the economy.

Current GST Structure On Insurance

At present, a GST rate of 18 per cent is applied to both term and health insurance policies. This additional cost increases the financial burden on policyholders, particularly for senior citizens and individuals purchasing coverage up to Rs 5 lakh. This makes insurance less accessible for many segments of the population, which is concerning given the growing importance of financial and healthcare protection.

Potential Impact Of GST Reduction Or Elimination

Affordability For Policyholders

Reducing or eliminating GST would directly lower the cost of insurance premiums. This reduction would especially benefit:

Senior Citizens: Often facing higher premiums due to age-related risks.

Low- And Middle-Income Groups: For whom even small cost reductions could make insurance more accessible.

Revenue Implications

The government has not provided a specific projection of revenue losses due to potential GST reductions. However, a significant reduction could lead to:

Short-Term Revenue Losses: A temporary dip in GST collections from the insurance sector.

Long-Term Gains: Wider insurance penetration could offset losses by increasing overall economic stability and reducing healthcare-related financial risks for households.

Regulatory And Monitoring Mechanisms

To ensure that insurers pass on the benefits of GST reductions to policyholders:

Competitive Pressure: A reduction in GST would naturally lower the cost of policies in a competitive market.

Irdai Oversight: The Irdai has frameworks in place to monitor and regulate premium rates and product structures.

However, the government and Irdai may need to strengthen mechanisms to ensure transparency and compliance, particularly in aligning premium rates with reduced tax burdens.

Making Healthcare More Equitable

Eliminating GST on health insurance could serve as a step toward more equitable healthcare by:

• Reducing the financial burden on vulnerable groups.

• Encouraging more people to opt for health insurance, thus enhancing financial preparedness for medical emergencies.

• Additionally, complementary measures such as increasing awareness about health insurance benefits and offering targeted subsidies could amplify the impact.

Challenges And Considerations

Fiscal Implications: Balancing the need for affordable insurance with the government's revenue needs is a delicate task.

Potential Misuse: Ensuring that reduced GST benefits are not offset by increased premiums or other charges by insurers.

Administrative Coordination: Effective communication and coordination among stakeholders, including the GST Council, Irdai, and insurers, are vital.

What Lies Ahead

The GST Council's decision to form a Group of Ministers (GoM) to review GST rates on insurance signifies progress. The GoM's recommendations, expected in the coming months, could pave the way for significant reforms in insurance taxation.

For now, policyholders and industry stakeholders await further developments that could make insurance not just a necessity, but an affordable reality for all.

Bottom Line: A reduction or elimination of GST on term and health insurance could provide much-needed relief to millions of policyholders. However, the ultimate success of such a measure would depend on effective implementation, robust regulatory oversight, and the alignment of stakeholder interests.