For years, insurance has been an essential financial safeguard, but the cost of premiums, coupled with high GST rates, has made it less affordable for many people. In an effort to provide relief, the government is considering lowering GST on health and life insurance from 18% to 5%. While this sounds like good news for policyholders, it comes with a trade-off.
If the proposed reduction is implemented, the government could lose around ₹36,000 crore in revenue. This has sparked discussions on whether such a steep cut is financially sustainable. Meanwhile, the insurance industry is advocating for a 12% GST rate instead of 5%. Their concern is that a drastic reduction could lead to a cost disadvantage and limit the ability to claim input tax credits.
The issue of tax credit utilization is another key factor in this debate. Under a 5% GST regime, many companies may struggle to use input tax credits, potentially leading to higher operational costs. If the government were to exempt insurance from GST entirely, the revenue loss could be even greater – around ₹50,000 crore annually.
Currently, insurance companies pay about 8-11% of their term plan costs as input tax. Between FY22 and FY24, GST collections from health insurance premiums alone reached ₹21,000 crore. With such numbers at stake, the government is weighing its options carefully.
The GST Council, which makes key tax decisions, is not in favor of a complete exemption but is open to reducing the tax rate. A final decision is expected in April or May after reviewing input from the Insurance Regulatory and Development Authority of India (IRDAI).