GST on health insurance

Context: Opposition leaders demanding the withdrawal of 18% Goods and Services Tax (GST) on life insurance and health insurance premiums.

GST on health and life insurance premiums

GST replaced all indirect taxes like service tax and cess and is currently set at 18% for health and life insurance policies.
Prior to GST, life insurance premiums were subject to a 15% service tax, including Basic Service Tax, Swachh Bharat cess, and Krishi Kalyan cess. The increase to 18% has raised premium costs for policyholders.

General insurance industry: Collected Rs 1,09,000 crore in premiums under the health portfolio for fiscal 2023-24.
Life Insurance Companies: Mobilized Rs 3,77,960 crore in premiums in FY2024, with LIC accounting for a significant portion.
Regional contributions: Five states (Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Delhi) contributed 64% of the total health insurance premiums.
Insurance penetration: Life insurance penetration decreased from 3.2% in 2021-22 to 3% in 2022-23, with non-life insurance remaining at 1%. Overall insurance penetration dropped to 4% from 4.2% during the same period.

Revenue generation: GST applies to all insurance policies as a service tax, generating significant revenue for the government, which can be used for public welfare and infrastructure development.
- As government collected around Rs 21,000 crore in GST over the last 3 FYs, with an additional around Rs 3,000 crore from the reissuance of health policies.
Tax exemption: Insurance policies allow certain deductions while computing income tax under Sections 80C and 80D of the Income Tax Act, 1961.
- Section 80C allows deductions of up to Rs 1.5 lakh on the total premium, including GST, while Section 80D provides additional deductions for medical riders with life insurance policies.
Simplification and uniformity: GST replaces multiple indirect taxes, simplifying the tax structure and providing uniformity across states, making it easier for insurers to comply with tax regulations.
Transparency: GST compliance often encourages digital record-keeping and transactions, lead to more transparency and efficiency in the insurance industry.
Constitutional framework: GST rates and exemptions are determined by the GST Council, which includes both central and state representatives. This ensures that decisions are made based on comprehensive inputs from various stakeholders.

Increasing out-of-pocket expenses for healthcare: High GST rates on insurance, acts as a deterrent to buying policies, making it less affordable for individuals and families, especially for those already facing high medical costs and increasing out-of-pocket expenses for healthcare.
Premium increases: Significant increases in health insurance premiums have led to a decline in policy renewals and unable to achieve the goal of "Insurance for All by 2047."
Impact on vulnerable populations: Low-income groups and senior citizens may find it particularly challenging to afford insurance with the added GST, potentially leaving them without financial protection in medical emergencies.
Contradiction to public health goals: May contradict government efforts such as Swasth Bharat Viksit Bharat to promote healthcare access and financial protection for all citizens.
Potential for reduced coverage: Individuals may opt for lower coverage or higher deductibles to offset the increased costs due to GST, may undermine the effectiveness of their insurance in covering medical expenses.

Parliamentary Standing Committee Recommendations:
- GST rates applicable to health insurance products, particularly retail policies for senior citizens and microinsurance policies (up to limits prescribed under PMJAY, presently Rs 5 lakh), and term policies may be reduced.
- It recommended that the Ayushman Bharat scheme can be expanded by allowing people who are not covered by the scheme to opt for it on a paid basis to achieve public health goal.
Sector-specific adjustments: Consideration of lower GST rates for specific categories such as retail policies for senior citizens, microinsurance policies, and health insurance could help in addressing affordability concerns.

Global scenario

In countries like Singapore and Hong Kong, there is no GST or VAT on insurance, making it more accessible to consumers.