Why a GST cut alone may not be enough to lower insurance premiums

Finance Minister Nirmala Sitharaman recently highlighted the possibility of reduced costs for health and life insurance policies if the GST Council recommends a reduction in the GST rates for these sectors. In her written reply to the Lok Sabha, she shared that the Council had proposed forming a Group of Ministers (GoM) to comprehensively review GST rates on life and health insurance.

If the GoM suggests a reduction, policyholders could experience lower premiums, making insurance coverage more affordable.

However, industry experts suggest that while this move has the potential to ease the burden on consumers, there are several factors that need to be addressed for the full benefits to be realised.

Rajesh Kumar, Founder of Square Insurance, said, "Insurance premiums are influenced by factors like claims, operational costs, and intermediary expenses.

"Without the benefit of input tax credit (ITC), insurers — especially those serving rural areas — will face higher operational costs, making premiums less affordable for many. This is a critical concern, as rural health insurance coverage already lags behind urban areas — 14.1% in rural areas compared to 18% in urban areas."

For the unversed, ITC is a provision in the GST system that allows businesses to claim back the tax they paid on inputs (e.g., raw materials or services used to run their business).

Without ITC, insurers would have to bear the full cost of GST on their inputs, which increases their operational costs.

Interestingly, government-backed health insurance schemes have a better penetration in rural regions (13.1%) than in urban ones (12%), underscoring the need for private insurers to fill this gap.

However, the challenge lies in achieving affordability when policy changes raise input costs for insurers.

When the GST regime was introduced in 2017, insurers were able to pass on the benefits of ITC to customers, which kept premiums competitive.

According to Kumar, for a reduction in GST rates to truly benefit policyholders, insurers must be allowed to claim ITC on services they consume. This would help them maintain lower premiums and continue expanding their reach.

"In rural India, where financial security is heavily tied to affordable health insurance, every rupee saved matters. A balanced policy that combines a lower GST rate with ITC eligibility can make insurance genuinely accessible, empowering families to protect their futures," Kumar explains.

Trivesh D, COO of Tradejini, also weighed in on the broader implications of the proposed GST changes.

He felt that the GST Council is at a crucial juncture where balancing fiscal responsibility with public expectations is essential.

He stated, "The proposal to reduce GST on health and life insurance could bring relief to policyholders, potentially lowering premium burdens. However, with over ₹16,000 crore collected from these segments in FY 2023-24, it's not a straightforward fiscal trade-off. The government would need to strike a delicate balance between public demand and revenue considerations."

From a corporate perspective, Trivesh D pointed out that eliminating GST input credits in some scenarios could increase operational costs for insurers, potentially offsetting the benefits of reduced GST rates.

However, he highlighted that targeted GST hikes on products like tobacco and aerated drinks reflect a policy direction aimed at curbing consumption while bolstering government revenue.

Ultimately, he said, the GST Council's decisions could set the stage for a more inclusive and equitable tax structure that benefits consumers while fostering sustainable growth across industries.