GST decision on health insurance premiums expected this week

The Group of Ministers (GoM) responsible for reviewing GST on insurance services will meet in New Delhi on August 20 to examine the existing tax structure on life and health insurance. The focus of the meeting is to evaluate GST rates applicable to various insurance categories and consider possible reductions. These include individual, group, and family floater health insurance policies, especially those catering to senior citizens, middle-class families, and individuals with mental illness.

The meeting will also consider tax rates on life insurance products such as term insurance and investment-linked plans, as well as reinsurance for these categories.

According to data collected by the Ministry of Finance, over 80 per cent of the premiums collected from individual health insurance policies come from plans offering coverage of up to Rs 10 lakh. Senior citizen-specific policies contribute around 18 per cent of the total premiums in the individual health insurance segment.

The 66th Report of the Standing Committee on Finance has underscored the urgent need to rationalise GST rates on insurance products. It highlighted that the current GST rate of 18 per cent on term and health insurance significantly increases the cost burden, making insurance less accessible to individuals. The report recommended that GST rates be lowered, particularly for retail health insurance policies for senior citizens, micro-insurance plans with coverage up to Rs 5 lakh (such as those under PMJAY), and term life insurance.

Despite repeated appeals over the years, the GST Council has so far refrained from reducing these rates. In the 37th GST Council meeting held in September 2019, the proposal to lower GST on pure term life insurance from 18 per cent to 5 per cent was rejected. The Council expressed concerns about potential revenue losses and pointed out that the effective tax rate on premiums was already relatively low, between 1.8 and 4.5 per cent. It also cautioned that exemptions could result in blocked Input Tax Credit (ITC) and increased compliance challenges for insurance providers.

Similarly, during the 47th GST Council meeting in June 2022, requests to remove GST on life and health insurance were turned down again. The Council argued that such exemptions would disrupt the tax structure and lead to cascading input taxes. Instead, the Council limited exemptions to specific postal services, while maintaining existing tax rates on insurance to avoid revenue leakage. The 55^th GST Council in Jaisalmer also heard the proposals but decided to give it more time, for the GoM to analyse it. 

Now, fresh proposals are being considered ahead of the upcoming 56th GST Council meeting. These include exempting individual term life insurance policies and their reinsurance from GST. While no immediate changes are expected for group term life insurance, the GoM may revisit this at a later stage. On the health insurance front, the proposals suggest exempting individual policies for senior citizens and those offering coverage up to Rs 5 lakh from GST, including their reinsurance. Additionally, the GST rate on insurance policies for persons with mental illness may be reviewed by the Fitment Committee, which has been directed to seek input from the Department of Financial Services.

A final decision on these changes is expected soon after the GoM meeting, with the proposals likely to be presented at the next session of the GST Council for approval.