GST Council to Weigh Reducing Tax on Health & Term Insurance at Dec Meeting

The debate around reducing GST on health insurance specifically has been controversial, as this tax generates approximately INR 2,500 Ct in revenue.

The GST Council is expected to discuss reducing the Goods and Services Tax (GST) on specific insurance plans, including term and health insurance, during its upcoming meeting on December 21 and 22 in Rajasthan.

According to a report from the Times of India, the Council may consider removing the 18% GST on term insurance policies and potentially eliminating GST on health insurance for senior citizens and individuals purchasing coverage up to INR 5 lakh.

While these tax reductions could relieve insured citizens, significant GST rate changes for other goods and services are unlikely at this session.

Many states, including Kerala and West Bengal, have raised concerns about potential revenue loss from lowering GST rates.

Some states, particularly those not governed by the National Democratic Alliance (NDA), oppose reducing the current GST rate slabs from four to three.

Presently, goods and services are taxed across four slabs: 5%, 12%, 18%, and 28%, with the highest slabs of 18% and 28% accounting for about 75% of the total GST revenue.

Revenue Concerns Hinder Broader GST Rate Cuts

The debate around reducing GST on health insurance specifically has been contentious, as this tax generates approximately INR 2,500 Cr in revenue.

States have been cautious about potential revenue loss, particularly given that the Center has ceased compensation for shortfalls in GST collections.

A proposal prepared by a Group of Ministers (GoM) led by Bihar’s Deputy CM, Samrat Chaudhary, recommends reducing GST on health insurance.

According to sources, this proposal is considered one of the least controversial points for discussion in the upcoming meeting.

Another panel, led by Minister of State for Finance Pankaj Chaudhary, is examining the future of the compensation cess, a levy applied to luxury and "sin" goods to fund state revenue shortfalls.

However, a decision on this cess, which will remain in effect until March 2026, is anticipated only by late 2025.

Calls for GST Cuts on Essential Services Grow Louder

The proposal to reduce GST on health insurance has gained momentum, partly spurred by an earlier appeal from Transport Minister Nitin Gadkari, who wrote to Finance Minister Nirmala Sitharaman urging the removal of indirect taxes on health insurance.

Although the letter was not meant to be public, it brought to light the growing demand for tax relief on essential health services.

The call for GST reduction in this sector highlights the country's significant income inequality and the urgent need for accessible healthcare.

India’s insurance penetration rates remain lower than those in many other countries, with the tax burden cited as an added obstacle for those seeking health insurance.

Reducing GST on insurance premiums could help ease this financial strain and support the government's goal of expanding healthcare access across all socio-economic segments.

Industry Wary of Insurers Absorbing GST Relief

Despite the public's support for reduced GST on insurance premiums, some state finance ministers have expressed concerns that insurers might retain any tax benefits instead of passing them on to consumers.

This sentiment was voiced during a GST Council meeting in September, where ministers noted that premiums have increased since the COVID-19 pandemic due to rising claims.

Although COVID-related claims have since decreased, insurance companies argue that the cost of managing claims still outweighs premium collections. As a result, policyholders have seen little relief, despite insurers facing fewer pandemic-related claims today.

"While there's pressure to reduce the GST burden on consumers, companies are citing increased claims handling costs as a reason for not lowering premiums," one minister explained.

The Council will likely weigh these concerns during its discussions, as it considers ways to ensure any tax relief benefits policyholders rather than solely bolstering insurers’ profit margins.

Although there has been talk of reducing GST on essential items and increasing taxes on luxury goods, the Council is not expected to make any broad reforms at this meeting.

The primary focus will likely remain on term and health insurance, with any potential rate reductions viewed as an effort to support consumer affordability in the healthcare sector.

With insurance penetration still low in India, tax cuts on premiums could encourage more people to secure health and life insurance coverage, aligning with the government’s larger goals of expanding healthcare accessibility and affordability.

Stay tuned for more such updates on Digital Health News.