GST on insurance may be slashed to 5%

The Goods and Services Tax (GST) Council may settle for a reduction in the tax rates on health & life insurance, instead of a full waiver. The GST, which now applies at 18% on gross premiums, is likely to be reduced to 5%, while retaining the facility of input tax credit, according to official sources.

Most members of the Group of Ministers (GoM) that reviewed tax rates for health and life insurance are favouring the tax cut, but feel that a full exemption could only jack up costs as input taxes would get accumulated for the insurers. In fact, sections of the insurance industry reckons that even a 5% tax will result in non-utilisation of tax credit, and pitch for a 12% output tax liability.

“We are not in favour of completely exempting life and health insurance premia from GST, but wish to reduce the rates. We have finalised our report…now it’s up to the Council to decide,” a member of the GoM told FE. Another member said: “A 5% GST on life and health insurance premia would reduce the burden on policy holders.”

The GST Council is likely to meet in April or May to deliberate on the issue, where it will also consider the report prepared by Insurance Regulatory and Development Authority of India (IRDAI) on taxation of these insurance premia.

Some experts had pointed out citing global precedents that what is needed is a shift in the tax base in keeping with the notion of value added tax. Instead of the gross premium, the tax base should be premium, as reduced by claims, which is profit mark-up of the insurer. But it is unlikely that the tax will be restructured in such a manner.

Last month, the insurance industry proposed to the IRDAI and the department of financial services (DFS) that a GST rate of at least 12% should be levied on health and life insurance premia, along with the benefit of input tax credit to the insurance business.

The insurance companies said that input tax paid constitutes around 8-11% of their cost on term plans, which should be offset through availing ITC. In case the tax is lowered to 5%, the insurance industry will be at a cost disadvantage.

In February, Central Board of Indirect Taxes and Customs (CBIC) Chairman Sanjay Kumar Agarwal told FE that giving health and life insurance premiums a complete exemption from the GST may lead to an increase in their costs, which will be contrary to what the government intends to do.

“A complete exemption will deny the benefit of input tax credit (ITC) to insurance companies, which will be factored into the premiums they charge from people,” Agarwal told FE in an interview. Under the GST laws, ITC benefit is not available for those goods and services which are exempt from the levy of the GST.

Moreover, sources say, most GoM members are unlikely to agree to a 12% rate, as it doesn’t grant adequate relief to policyholders.

“The government wants to give relief, but a complete GST exemption is not the best solution. If insurance is fully exempted, companies won’t be able to claim tax credits, which could actually increase their expenses and, in turn, premium prices,” said Sandeep Sehgal, partner-tax, AKM Global. “The GoM is considering a better solution—reducing GST to 5% while allowing companies to claim ITC,” he added.

FE had reported in October, that the GoM tasked with reviewing tax on health & life insurance, had taken a view that no GST should be levied on term life insurance, and on health insurance premiums paid by senior citizens, above the age of 60. It, however, decided against a complete tax waiver for health insurance, where the GST is levied at 18% at present.

According to sources, a complete exemption of term-life insurance from GST will cost the exchequer about Rs 200 crore annually, while exempting senior citizens’ health insurance premiums will cost another Rs 3,000 crore, sources said. Between FY22 and FY24 the total GST collected from health insurance premiums was about Rs 21,000 crore.

Bipin Sapra, tax partner, EY India said that globally, exemptions are considered as the worst form of benefit the industry can ask for since the ITC gets blocked, leading to cascading and higher prices. “Accordingly, 5% with ITC is low to benefit the customers and high enough to be able to recover most of ITC on inputs,” he added.

Sivakumar Ramjee, executive director, Nangia Andersen said: “With a 5% rate with ITC ensures insurers can claim input tax credits, decreasing the cascading tax burden and keeping premiums competitive.” Additionally, this approach limits the government revenue loss to around Rs 36,112 crore, compared to Rs 50,000 crore if fully exempted, said Ramjee.