73-74% of GST collected from health, insurance premiums goes to states: Nirmala Sitharaman in Lok Sabha

GST on insurance premiums: Union Finance Minister Nirmala Sitharaman on Wednesday said 18% of Goods and Services Tax (GST) collected from health and insurance premiums is equally shared between the Centre and states. She said of the 9% share that is accorded to the Centre, 41% is further sent to states. Overall, 73-74% of GST revenues received from insurance premiums are sent to states, she added. 

Replying to the Opposition bloc, FM Sitharaman cited Union Minister Nitin Gadkari's letter to demand the removal of GST on health and life insurance. She said since the letter came in the public via an unreliable source, the Opposition MPs have been protesting in the Parliament with 200 MPs to demand the removal of GST.

Talking about the GST in insurance premiums, Sitharaman said, "I want to raise two important points - tax has been there on medical insurance even before the introduction of GST. There was already a pre-GST tax on medical insurance, before the GST was introduced. This is not a new issue, it was already there in all the states. Those protesting here... did they discuss regarding the removal of this tax in their states?"

Sitharaman told the house that of the 18% premium collected from GST on health, an equal share of 9% each accrues to states and the Center. Challenging claims from a newspaper report, Ms Sitharaman explained that of the 9% share that is accorded to the Centre, 41% is further sent to states (as per provisions of the GST regime). That means 73-74% of GST revenues received from premiums, she added. 

FM Sitharaman noted that Rs 12,264 crore of the amount collected from GST on the life and medical insurance went to the states.

In a separate reply, the Centre noted that around Rs 24,000 crore was collected from GST on health and life insurance in the last three financial years. Another Rs 3,274 crore was collected from the reissuance of health policies.

Last week, Road Transport minsiter Nitin Gadkari asked FM Sitharaman to remove the goods and services tax (GST) on life and medical insurance premiums which currently attract an 18 per cent GST rate.

Forwarding a memorandum by the Nagpur Division Life Insurance Corporation (LIC) Employees Union, Gadkari wrote in his July 28 letter: “In view of the above, you are requested to to consider the suggestion of withdrawal of GST on life and medical insurance premium on priority as it becomes cumbersome for the senior citizens as per rules with due verification along with other relevant points raised.” 

Goods and Services Tax regime came into effect on July 1, 2017, replacing various indirect taxes such as service tax and cess. Currently, the GST rate on health and life insurance policies is fixed at 18%. The inclusion of GST, which subsumed the earlier service tax applicable to the insurance sector, has led to an increase in premium costs.

Previously, life insurance premiums were levied with a 15% service tax, which consisted of Basic Service Tax, Swachh Bharat cess, and Krishi Kalyan cess. The transition from 15% service tax to the fixed rate of 18% under GST has directly impacted policyholders by raising their premium payments.

In conjunction with the escalating expenses of healthcare services – the medical inflation rate was reported to be at 14% by the end of the previous year – obtaining medical insurance has become a daunting task for many individuals.

GST is levied on all insurance policies as they fall under the category of services, necessitating policyholders to pay tax on their insurance premium. GST rates and exemptions on all services, including GST on health insurance premium, are determined based on the recommendations of the GST Council.

Insurance providers have accounted for a surge in retail inflation which has augmented their overall operational expenses. They stress that medical inflation surpasses retail inflation significantly as evidenced by a rate of 5.08% in June of the current year.

In the fiscal year 2022-23, merely five states - Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Delhi - collectively accounted for about 64% of the total health insurance premium, with the remaining 36% attributed to all other states combined.

Insurance policies offer taxpayers the opportunity to claim deductions on their income taxes. In particular, Sections 80C and 80D of the Income Tax Act, 1961 are popular avenues for tax-saving deductions, with a focus on life insurance premiums. Section 80C allows for deductions of up to Rs 1.5 lakh on insurance premiums, inclusive of GST. Additionally, Section 80D provides supplementary deductions on premiums for customers who include a medical rider with their life insurance policies.