As the government considers overhauling GST rates across various sectors, the insurance industry is in focus. A proposal to reduce the Goods and Services Tax (GST) on life and health insurance from the current 18 per cent to 5 per cent or even zero is under serious discussion, according to a report by CNBC-TV18. While this may sound like good news for policyholders, experts say that lower GST might not necessarily lead to cheaper premiums. In fact, it could have the opposite effect.
Why Cheaper GST Doesn’t Mean Cheaper Premiums
At first glance, a lower GST rate seems like it would reduce the overall cost of insurance. But industry leaders are warning that this may not be the case. Why? Because of how GST rules and input tax credits work.
Currently, insurance companies pay 18 per cent GST and are allowed to claim Input Tax Credit (ITC) on various expenses—such as rent, marketing, and other services. This credit helps insurers reduce their overall tax burden and operating costs.
However, under GST rules, if the tax rate drops to 5 per cent or zero, insurers lose access to Input Tax Credit. This means their costs go up, as they can no longer offset the taxes they pay on services required to run their business. The end result? Higher operational expenses, which insurers may pass on to customers through increased premiums.
Industry Concerns and Government Discussions
According to the CNBC-TV18 report, insurance industry leaders are planning to approach the Finance Ministry to express concerns over the proposed GST cut. Their main worry is that such a move, while well-intentioned, could end up being counterproductive by increasing costs for both insurers and policyholders.
What Has the IRDAI Said?
Earlier in July, the Group of Ministers (GoM) on insurance had recommended removing GST entirely on term life insurance policies and health insurance plans for senior citizens. Before any decision is made, the Finance Ministry has also sought recommendations from the insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI). These were submitted to the GST Council back in December 2024 and are currently under review.
The Bottom Line
While a GST cut on insurance might seem like a relief for policyholders, it’s more complicated than it appears. Without access to input tax credits, insurers may face rising costs, which could ultimately reflect in higher premiums. As discussions continue between industry stakeholders and the government, a balanced approach will be key to ensuring that any GST changes truly benefit consumers.
