New Delhi: The Goods and Services Tax (GST) Council is set to meet on Monday, with discussions expected to focus on reducing the tax burden on health and life insurance policies. However, the proposal to lower GST on insurance premiums is meeting resistance from several states, which fear a significant loss of revenue, particularly from medical insurance, ToI reported.
Push for Lower GSTon Health Insurance
The debate around the tax on health insurance gained momentum after Union Transport Minister Nitin Gadkari urged the Finance Ministry to scrap GST on health insurance. In his letter, Gadkari highlighted the increasing financial burden on policyholders due to the consistent rise in insurance premiums, which often climb by 10 to 20 percent annually. This surge, he argued, adds strain on Indian citizens, particularly senior citizens, who are either retired or dependent on their savings for survival.
As medical costs continue to rise, many in India question why a service as essential as healthcare is taxed so heavily. In a country with significant income inequality and a healthcare system in need of improvement, health insurance is often seen as a necessity rather than a luxury. Despite this, India’s insurance penetration remains relatively low, and the added tax on health insurance only exacerbates the financial challenges faced by those seeking medical coverage.
States’ Reluctance to Cut GST on insurance
While there is pressure to reduce the GST on health insurance, several state governments remain opposed to the idea due to the potential revenue loss, ToI reportd. The GST fitment committee, which includes officers from both the Centre and the states, has been unable to reach an agreement on the matter. Many states fear that cutting the tax could result in a substantial drop in revenue, a concern made even more pressing by the fact that they no longer have the cushion of compensation from the Centre, which was previously offered when GST was introduced.
Between April 2021 and March 2024, the Centre and states collected over Rs 21,000 crore in GST from health insurance premiums. In the last fiscal year alone, this figure was estimated at Rs 8,200 crore. With the states receiving half of the GST revenue, they stand to lose around Rs 4,100 crore annually if the tax is cut. Furthermore, states also receive 41% of the central GST, meaning any reduction in the tax rate could further impact their finances.
States no longer have the safety net they once did, when they were open to tax cuts because the Centre would cover any revenue loss through the compensation cess, an official told ToI.
This financial strain has led even some of the strongest advocates for lower GST, such as West Bengal (ruled by the Trinamool Congress) and Karnataka (ruled by Congress), to publicly oppose changes to the current GST structure. These states fear that a tax cut would hurt their already strained budgets.
India’s Low Insurance Coverage
A report by Niti Aayog highlights the stark reality: nearly 30% of India’s population, or around 40 crore people, still lack any form of financial protection for healthcare. This lack of coverage leaves millions vulnerable to the high costs of medical treatment. The Economic Survey predicts that India’s insurance penetration, measured as a percentage of Gross Domestic Product (GDP), will rise from 3.8% in FY23 to 4.3% by FY35. This growth is expected to be driven by the increasing demand for life insurance, particularly term policies, alongside the growth of Insurtech and a younger, more financially aware population.
Despite these optimistic forecasts, the current tax burden on health and life insurance remains a pressing issue for consumers. At present, these policies attract an 18% GST, a rate that many argue is too high for essential services.
Other Items on the Agenda at GST Meet
While the debate over GST on health and life insurance will likely dominate discussions, the Council will also address other key issues during Monday’s meeting. One of these includes a status report on the taxation of online gaming, a subject that has sparked significant debate. Additionally, clarifications on GST regulations for branches of companies are expected to be discussed. This is particularly relevant for companies like Infosys, foreign airlines, and shipping firms, which have been hit with demands from the Directorate General of GST Intelligence.
As the GST Council gears up for what promises to be a critical meeting, all eyes will be on the discussions surrounding insurance tax relief. The outcome could have far-reaching implications for consumers, especially those seeking health insurance, as well as for state governments concerned about their revenue streams.
