GST cut on health insurance: We may not be celebrating a likely tax cut this time

Like the GST Council prepares for its next meeting on Monday, a big topic on the agenda is the high Goods and services tax on health and life insurance policies. While there is talk of reducing the tax, states are concerned that insurance companies will not be able to pass the savings on to consumers if there is no system in place to ensure this happens.

Concerns over GST cuts in health insurance

The idea of ​​reducing GST on life insurance seems to have a majority consensus, with state finance ministers less concerned about it. However, the real problem lies with health insurance, and it is not just about losing revenue. Officials are exploring options that could help consumers, but there are concerns that insurance companies will keep the benefit for themselves and not pass it on to people who buy health insurance, a state finance minister told ToI.

Another minister said that while there is pressure to reduce the burden on consumers, companies have been increasing premiums since the COVID-19 pandemic, citing rising claims. While COVID-related claims have since declined, insurance companies have not provided any relief to policyholders. Instead, they claim that the cost of handling claims remains higher than the premiums they charge.

Ministers will make an effort to suggest a formula that will reduce the burden on consumers and also ensure that the benefit is not absorbed by businesses, the minister told ToI.

Previously, the government had anti-profiteering laws that ensured that companies passed on tax benefits to consumers when GST rates were reduced. These laws allowed authorities to intervene and ensure that companies did not pocket the savings. However, with fewer changes to GST rates taking place, the government has left these laws ineffective. This leaves officials without the power to ensure that consumers see lower premiums if the GST is reduced.

Many within the government now agree that the 18% GST on health insurance is too high and must be reduced. But without an active anti-speculation body, there is little guarantee that insurance companies will reduce premiums accordingly.

Goods and Services Tax (GST) on health insurance: Does it help only high-premium policies?

One of the ideas being floated is to offer tax breaks on policies with annual premiums of Rs 50,000-60,000. However, this may not help most middle-class families. A typical family of four, including two children, usually ends up paying around Rs 50,000 for a health insurance policy with a cover of Rs 15 lakh. But in case of a serious illness, even this amount may not be enough. For older people, the cost of insurance is much higher because of their age and health risks.

Moreover, setting such limits on tax benefits could complicate the GST system, which was originally designed to be simple. However, there seems to be pressure within the bureaucracy to bring back such complexities.

States worry about revenue loss due to GST cut

The call to reduce GST on health insurance gained momentum after the Union Transport Minister Nitin Gadkari He urged the Finance Ministry to remove GST on these policies. In his letter, Gadkari highlighted the financial burden borne by citizens, especially pensioners and senior citizens who depend on their savings.

This sparked a broader debate on whether it is fair to heavily tax something as essential as healthcare. In a country with income inequality and a healthcare system that needs improvement, health insurance is seen as a necessity, not a luxury. Despite this, insurance coverage in India remains low compared to other countries, and the tax on health insurance only makes it harder for people to afford it.

According to a report by NITI Aayog, about 30% of India’s population, or around 40 million people, do not have financial protection for healthcare, leaving many vulnerable to costly medical bills. While the Economic Survey predicts that India’s insurance coverage will rise from 3.8% of GDP in FY23 to 4.3% in FY35, the immediate issue of the 18% goods and services tax (GST) on health insurance remains a burden on consumers.

Although there is pressure to reduce the GST on health insurance, many states are hesitant because of the potential loss of revenue. The GST adjustment committee, which includes officials from both the central and state governments, has been unable to agree on a solution. States are concerned that reducing the tax could result in a significant drop in revenue, especially now that they no longer receive compensation from the central government, as was the case in the early days of the GST.

Between April 2021 and March 2024, the Centre and states collected over ₹21,000 crore in GST from health. insurance premiumsIn the last fiscal year alone, this figure was around ₹8,200 crore. States get half of this revenue, meaning they would lose around ₹4,100 crore if GST on health insurance is reduced. Also, states get 41% of the central GST, which means an additional dent in their finances if the tax rate is reduced.

(With ToI inputs)