Indians may have to overcome a fiscal headache to secure their health

When Indian parliamentarians from opposition parties demanded Finance Minister Nirmala Sitharaman Consider eliminating the goods and services tax that taxes life and health insurance policies, raised some factors associated with taxes.

“I want to raise two important issues: the tax on health insurance was already there before the introduction of GST. There was a tax on health insurance before the introduction of GST. It is not a new issue, it was already there in all states. Did those protesting here talk about the removal of this tax in their states?”

The demands of The elimination of indirect tax on health insurance came to light as demanded in a letter by one of her colleagues, Transport Minister Nitin Gadkari. Sitharaman later said The letter was not intended to be public..

However, in a country with high income inequality and a healthcare infrastructure that needs a major boost, Indians are debating why they should pay taxes for something that is considered a necessity – healthcare. The insurance penetration rate in India is much lower compared to many other nations and taxes are an additional cost that citizens have to bear if they want to buy health insurance.

A Niti Aayog report said 30 per cent of the population, or around 40 million Indians, still lack any form of financial protection for health.

The Economic Survey forecasts that insurance penetration, measured as a percentage of GDP, will increase from 3.8% in fiscal year 2023 to 4.3% in fiscal year 2035. At the same time, life insurance premiums are expected to grow at an annual rate of 6.7% between 2024 and 2028. This growth is driven by rising demand for term life insurance, a younger population, and advances in Insurtech.

Health Insurance: The Affordability Question

Parthanil Ghosh, Director and Chief Commercial Officer of HDFC ERGO General Insurance told ET Online that while the tax structure has been simplified since the introduction of GST in 2017, the affordability factor has become an adverse issue for policyholders.

“While the single rate has ensured that the tax structure for policyholders is simplified and transparent, the affordability factor has been adversely affected as it has made health insurance premiums more expensive by the GST amount,” Ghosh explained. However, Ghosh highlighted a positive aspect: “With Input Tax Credit available on GST paid by the insurer, the net impact of GST is comparatively less than that of Service Tax for some non-life insurance products.”

“Insurance companies determine gross premiums based on the expected cost of claims and associated expenses. These premiums are inclusive of applicable GST. Thus, an insurance policy with a premium of Rs 15,000 will incur an additional cost of Rs 2,700 (Rs 15,000 * 18%). The input tax credit availed by an insurance company for services purchased ensures that these costs are not passed on to the policyholders,” he said.

Insurance solutionShilpa Arora, COO and co-founder, maintains that the amount of GST imposed on premiums is “not justified”.

“There is no justification for an 18% GST on premiums. Insurance products are bought to protect families from financial loss due to premature death or illness. While the IRDAI talks about insurance for all by 2047, the government should reduce the GST to make premiums more affordable,” Arora told ET Online.

Star Health did not respond to ET Online’s query.

Indians’ reluctance to buy insurance

Insurance premiums typically increase by 10 to 20 percent, adding to the financial pressure on the policy buyer. This annual increase in premiums increases the cost burden on Indians and particularly affects senior citizens, especially those who have retired and may rely on savings to survive.

“In India, where around 40 million people do not have financial protection for health, it is a cause of concern, especially for senior citizens, who may need a high sum insured and hence bear the brunt of the GST rate,” said Ghosh of HDFC Ergo.

Shilpa Arora weighed in on this sentiment and said that if the government decides to reduce Goods and Services Tax (GST) on InsuranceIt would also help reduce premium prices.

“In case of life insurance, if an endowment product is purchased, the customer pays Rs 59,000 as premium but the investment will be considered Rs 50,000 (with death charges and expenses deducted) and Rs 9,000 as GST element. This results in lower returns because the policyholder calculates the total price paid and the return received. He often feels cheated and loses confidence in insurance products. We receive many complaints from people who have seen their health insurance premiums increased significantly and are asking for a reduction. In this case we cannot do much but the government can certainly help by reducing the GST rate,” Arora said.

GST withdrawal on insurance: a real possibility?

Taxes are what helps a nation function. Asking for a tax exemption seems like a difficult proposition in a developing country like India. Experts believe that tax reduction or exemption would have a positive ripple effect on citizens. But what impact would such an exemption have on insurers?

“If GST is exempted on insurance premiums, then insurance companies would not be able to avail input tax credit (ITC) on GST paid by the insurance company and hence, it might not truly benefit the policyholders,” Ghosh said.

Shilpa Arora, for her part, welcomed any future prospects of a possible tax exemption on life and health insurance.

“This will make premiums more affordable; people will be able to buy better coverage. The profitability of life products will improve,” he said.

Ghosh offered a different solution.

“If the GST rate is set at 0% or any rate lower than the current rate of 18% instead of exempt, then the benefit equivalent to the ITC credit availed would be passed on to the customers, and this is expected to result in lower premiums for the customer,” Ghosh said.

The low percentage of insurance penetration

According to Financial Services Secretary Vivek Joshi, insurance penetration in India has increased from 3.9 per cent in 2013-14 to 4 per cent by 2022-23. While the insurance sector has seen an influx of people investing in life and health insurance plans, insurance awareness remains low in India compared to other nations.

Ghosh said several factors are contributing to the slow growth in insurance penetration.

“Affordability of health insurance policies and financial literacy are major hurdles as many people are unaware of the benefits of insurance in the country. With the country being more affordable, it is difficult to convince consumers about insurance policies. There is also a lack of customized products and less trust in insurance policies.”

Arora of Insurance Samadhan said a reduction in premiums would help encourage more investment in life and health insurance policies. He agreed that a more flexible tax regime would help increase the percentage of policyholders.

“Lower premiums will translate into higher coverage and also reduce policy lapses in later years. We strongly believe that 18 per cent is too high for a product that is essential for every Indian family,” Arora said.

The insurance penetration rate in India reveals that many people do not take out insurance. Experts associate this low rate with two crucial factors: medical inflation and the absence of a healthcare regulator.

“The absence of a healthcare regulator has led to an annual inflation in healthcare prices of over 10%, which in turn drives up health insurance premiums. In fact, post-COVID-19, we have seen a sharp rise in healthcare inflation, along with the costs of modern technology, leading to an increase in health insurance premiums,” Ghosh said.

He further said that “to drive insurance penetration in India, it is essential to adopt a multi-faceted approach and complement it with other factors such as a strong distribution network, innovative products and services and a seamless claims experience to increase insurance awareness.”

The moment of truth: Insurance claim rejections

GST may be one of the issues causing Indians to be reluctant to invest in insurance policies. Another important reason for this reluctance may be related to the rising percentage of rejected insurance claims.

A survey by Local Circles showed that at least 43 percent of insurance claims were partially approved or denied in the past three years.

The survey cited the experiences of several policyholders, who revealed the challenges they faced when filing an insurance claim.

“From insurance companies denying claims by classifying a health condition as a pre-existing condition to only approving a partial amount, 43 percent of health insurance policyholders who filed a claim in the past three years had difficulty processing it,” the report said.

“The insurance industry experiences significant fraud in the reimbursement mode, leading to high rejection rates,” said HDFC Ergo’s Ghosh.

Shilpa Arora acknowledged that the rejection of an insurance claim has a negative impact on policyholders.

“A claim rejection breaks the trust of the policyholder, because the moment of trust in an insurance product is the claim. IRDAI is doing a lot to improve the policyholder experience, such as the new health insurance guidelines and the revamped grievance mechanism,” Arora said.