The GST Council will meet on Monday to discuss reducing the tax burden on health and life insurance policies. However, several states are resisting the proposal to lower GST on insurance premiums, fearing significant revenue losses, especially from medical insurance, ToI reported.
The debate over the tax on health insurance intensified after Union Transport Minister Nitin Gadkari urged the Finance Ministry to eliminate GST on health insurance. In his letter, Gadkari emphasized the growing financial burden on policyholders due to annual insurance premium increases of 10 to 20 percent. He argued that this surge particularly strains senior citizens, who are often retired or reliant on their savings.
As medical costs rise, many in India question the heavy taxation on essential healthcare services. In a country with significant income inequality and a healthcare system needing improvement, health insurance is viewed as a necessity, not a luxury. Despite this, insurance penetration remains low, and the added tax on health insurance exacerbates the financial challenges for those seeking medical coverage.
Despite pressure to reduce GST on health insurance, several state governments oppose the idea due to potential revenue loss, ToI reported. The GST fitment committee, comprising officers from both the Centre and states, has yet to reach an agreement. States fear that cutting the tax could lead to a significant revenue drop, especially since they no longer receive compensation from the Centre, which was provided when GST was first introduced.
From April 2021 to March 2024, the Centre and states collected over Rs 21,000 crore in GST from health insurance premiums, with Rs 8,200 crore collected in the last fiscal year alone. States receive half of this revenue, meaning they could lose around Rs 4,100 crore annually if the tax is reduced. Additionally, states receive 41% of the central GST, so any tax rate reduction could further impact their finances.
Without the previous safety net of compensation from the Centre, states are more cautious about agreeing to tax cuts, an official told ToI.
This financial strain has led even strong 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 further strain their budgets.
India’s Low Insurance Coverage
A Niti Aayog report highlights a stark reality: nearly 30% of India’s population, or around 40 crore people, lack any form of financial protection for healthcare. This leaves millions vulnerable to high medical costs. The Economic Survey predicts that India’s insurance penetration, measured as a percentage of GDP, will rise from 3.8% in FY23 to 4.3% by FY35. This growth is expected to be driven by 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. Currently, these policies attract an 18% GST, a rate 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. These include a status report on the taxation of online gaming, a subject of significant debate, and clarifications on GST regulations for company branches. This is particularly relevant for companies like Infosys, foreign airlines, and shipping firms, which have faced demands from the Directorate General of GST Intelligence.
As the GST Council gears up for a critical meeting, all eyes will be on the discussions surrounding insurance tax relief. The outcome could have far-reaching implications for consumers seeking health insurance and for state governments concerned about their revenue streams.