There is a growing demand to reduce or eliminate the current 18% Goods and Services Tax (GST) rate on life and health insurance policies. The high GST rate on insurance premiums poses a significant obstacle, especially for individuals with limited incomes. The combination of high premiums and GST makes insurance products inaccessible to many.
Ajit Jha, a financial influencer and educator at the Institute for Studies in Industrial Development, highlights that the elevated GST rates discourage policyholders from renewing their policies and dissuade them from obtaining insurance coverage.
In a post on social media X, Jha pointed out that if a policyholder is paying nearly Rs 6,000 as the GST rate to renew the general insurance policy of Rs 23,000, then this is no less than terror.
Giving a breakup in the policy renewal form, Jha highlighted that the policyholder is paying a premium of Rs 30,373 with an additional GST of Rs 5,467 for a base sum insured of Rs 25 lakhs.
"#Terror of Insurance Premium and GST. Just after one year, our annual insurance premium increased from Rs. 23,000 to Rs. 30,000. GST charge increased to Rs. 5,467. @CareHealthIndia @FinMinIndia. Please suggest what do you expect from common people. Don’t you think it a terror 4 us," Jha said in his post.
In the same string of posts, he added: "Rs. 5,467 is just the GST rate to renew a general insurance policy of @CareHealthIndia. Should I continue or terminate this burden @nsitharaman ji."
Demand to cut GST on insurance premiums
The demand for a reduction or elimination of the current Goods and Services Tax (GST) rate of 18% on life and health insurance policies has been steadily increasing. Following Union Minister Nitin Gadkari's call to action on this issue, there is a sense of optimism among the public that a rate cut may soon materialize as it has been deliberated by the GST council.
A potential reduction in the GST rate would have a direct positive impact on policyholders, enhancing the accessibility and affordability of insurance products. This proposed measure holds significant importance in addressing the underinsurance issue, thereby promoting wider financial inclusion among the population.
The government receives a substantial amount of revenue from GST on insurance policies. According to the response provided by the government in Lok Sabha, over Rs 16,000 crores was collected through Goods and Services Tax (GST) on health and life insurance policies issued during the financial year 2023-24. It would be a difficult decision to forgo such a significant source of income. Therefore, a notable reduction in the GST rate presents a challenge for the government.
Additionally, insurance companies are uncertain whether a decrease in the GST rate will effectively lower their costs. They seek assurance from the government that even if the GST rate is reduced, they will still be eligible to claim the input tax credit on the insurance policies they sell. Without this assurance, it could result in an additional cost burden for the companies, ultimately leading to an increase in insurance premiums rather than a decrease.
"The 18% GST on premiums acts as a deterrent. Lowering the rate will make insurance products more affordable, directly benefiting policyholders," said Rajiv Gupta, President, PB Fintech.
Prior to the Budget, the insurance sector is optimistic about substantial reforms that will improve financial inclusion, tackle affordability issues, and harmonize India's insurance procedures with international norms. The 55th GST Council meeting, led by Finance Minister Nirmala Sitharaman in Jaisalmer, Rajasthan last month, postponed the potential decrease in GST on premiums. While the decision on the GST reduction rests with the GST Council, industry experts foresee some announcement or clarification in the forthcoming Budget.
“We have basically just made a humble submission that whatever rate they decide should be matched with a similar level input tax credit. That's the way in which we can then pass on any benefits to the customer. If that is not the case, then it may not really result in any benefit to the customer,” said Niraj Shah, chief financial officer and executive director, HDFC Life Insurance.