“Policy period: one year, Gross Total Premium: Rs 52,076, GST 18%: Rs 9,374,” read an X user’s health insurance receipt. “Health insurance is a necessity, why make it a luxury,” reads another post. Several social media posts have come up raising an issue against the 18% Goods and Services Tax (GST) on health and term insurance premiums. A decision on bringing down the high GST rate will most likely be taken in the GST Council’s November meeting. It should bring it down because there are several reasons that go against such prohibitive tax rate in a country that is grossly under-insured. People in countries like the US, the UK and South Africa, a Brics country, pay less in taxes on insurance than Indians.
At 4%, the insurance penetration rate in India is low. In 2021-22, insurance penetration (percentage of insurance premium to GDP) in India was 4.2% against a global average of 7%, a report by the Standing Committee on Finance said.
India is a country with no social security, and government-run medical infrastructure is rickety.
The additional cost of an 18% tax on health and term insurance might even decrease the number of people opting for insurance. These insurance rates are higher than in countries like the US and UK and even in South Africa.
Tax expert Sandeep Agrawal told India Today Digital that a reduction in the GST rate on insurance products would directly lower the overall cost of insurance premiums for customers.
A reduction in tax rates will also bring in more insurance companies, which will lead to better services, RC Sankhla, former Chief Commissioner of Customs and GST told India Today Digital.
Term insurance policies are pure life cover that do not give returns like Unit-Linked Insurance Policies (ULIPs), which combine insurance with investment.
Although the 18% GST has received a fair share of criticism from people within the BJP government and the opposition, the government hasn’t done away with or reduced the tax on insurance yet.
NITIN GADKARI SOUGHT REDUCTION IN GST ON INSURANCE
In a letter to the Finance Minister Nirmala Sitharaman, Union Road Transport and Highways Minister Nitin Gadkari expressed his concerns.
“Levying GST on life insurance premiums amounts to levying tax on the uncertainties of life. The Union feels that the person who covers the risk of life’s uncertainties to give some protection to the family should not be levied tax on the premium to purchase cover against this risk,” Gadkari wrote in the letter.
The GST regime came into effect on July 1, 2017. There has been continued discussion about lowering the rates but not to much avail.
The opposition has also voiced its concerns about an 18% GST on insurance.
Several MPs of the INDIA bloc gathered and protested against the 18% GST on insurance. They even held placards of “tax terrorism.”
Although the government has been able to fetch Rs 24,500 crore GST from health and reinsurance in the past three years, it comes at a high cost for the insured.
Ahead of the 54th GST Council meeting on September 9, there were reports that discussions would take place on reducing the GST rate on life and health insurance premiums. However, the GST Council has deferred the discussion, with plans to revisit it in its next meeting, slated for November 24.
India has the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY) scheme that covers medical expenses for up to Rs 5 lakh for people below the poverty line (BPL). In September, the Union Cabinet extended the PM-JAY health cover to all senior citizens aged 70 years and above, irrespective of their income.
However, there is no health cover offered by the government to the tax-paying middle class.
India Today Digital looked at data from other countries with higher insurance penetration to understand how GST on insurance works. It also spoke to experts on why people are being taxed at a high rate for securing their life and health by insurance.
TERM AND HEALTH INSURANCE SOUTH AFRICA, UK AND US
South Africa has recently approved a National Health Insurance (NHI) system aimed at covering medical costs for all citizens, particularly those who are uninsured.
This could lead to a decrease in private health insurance uptake, as the government has stated that people who are covered by the NHI fund wouldn’t be covered by private medical schemes. This approach is notable, as many countries with national healthcare systems still allow for private insurance to enhance treatment options.
In contrast, countries like the UK, US, France, and Germany have different tax structures for life and health insurance.
In the UK, life insurance is typically not taxed, but premiums for employer-paid health insurance are subject to tax.
The US offers tax-free life insurance benefits, with a Medicare tax for employees on wages.
These are countries with a higher insurance penetration rate and lower insurance taxation than India.
The US has an insurance penetration rate of 11.7%, the UK of 11.1% and South Africa 12.2%, according to a report by CafeMutual report.
This is way higher than India’s 4% insurance penetration.
EXPERTS ON 18% GST ON TERM AND HEALTH INSURANCE
Experts were of the opinion that the GST rate on term and health insurance needed to be lowered.
“The reduction in 18% GST on insurance services is likely to make an Insurance premium cheaper, hence, more attractive to common people and will lead to broader coverage ensuring medical facilities for everyone,” RC Sankhla, former Chief Commissioner of Customs and GST tells India Today Digital.
“It will also lead to more players in the field, leading to healthy competition, ensuring better insurance services,” he added.
Tax expert Sandeep Agrawal suggested that a lower rate of premium would benefit buyers, and help in increasing insurance penetration in India.
“A reduction in GST on insurance products will directly lower the overall cost of insurance premiums for customers. For instance, if GST is reduced from 18% to 12%, the effective premium paid by the policyholder would decrease proportionally. This makes insurance more affordable and accessible, potentially increasing the penetration of insurance in the market,” Sandeep Agrawal, Director and Founder of Teamlease Regtech told India Today Digital.
“Lower premiums could lead to increased market expansion, higher renewal rates, and incentivise existing policyholders to opt for enhanced coverage or add-ons, ultimately boosting financial protection. Additionally, this change aligns with government initiatives aimed at improving insurance penetration in India, where coverage levels are still low compared to global standards,” Agrawal added.
This will also have a positive impact on the economy.
“A lower rate will also ensure more jobs and further growth in the economy due to ripple effects. It will be very useful for senior citizens who are currently facing steep hikes due to older age,” added Sankhla.
WHY IS GST LEVIED ON HEALTH AND TERM INSURANCE?
But why is GST charged as a service at 18% on term and health insurance though there is no service offered until a person’s demise or falls sick, respectively?
“GST is charged on term and medical insurance premiums because these insurance products are considered to provide a continuous service of risk coverage, even though the actual benefits (claims) are contingent on specific events like death or illness. In the case of term insurance, the service provided is the financial protection and security that the insurer guarantees in the event of the policyholder’s death,” Agrawal tells India Today Digital.
Although it might look like no direct service is being provided, experts say that service is being provided.
“For health insurance, the service includes access to a network of healthcare providers & hospitals, administrative support, and the promise of coverage for medical expenses, even if no claims are made. Although it may seem like no direct service is rendered until a claim arises, the insurance provider’s ongoing risk management and promise of protection are considered taxable services under GST law,” adds Agrawal.
Though insurance might be a service, experts agree that the 18% GST rate on term and health insurance premiums is high and needs to be slashed. Indians, paying higher taxes than people in the US, the UK and South Africa, urgently need a lower insurance rate.
