Government abolishes Goods and Services Tax on life and health insurance policies, aiming to stimulate further growth in these sectors.

The Goods and Services Tax (GST) Council has announced a significant decision, exempting life and health insurance premiums from the GST as of September 22. This move is expected to bring relief to policyholders who, until now, were paying an 18% GST on their premiums.

Nilesh Sathe, a former member of the Insurance Regulatory and Development Authority of India (Irdai), notes that the major impact of this decision will be on existing policies, as insurance companies cannot increase their premiums under the plea that the Input Tax Credit (ITC) is not available. For any change in premium, insurers will have to withdraw the existing plan for sale and relaunch a new plan with higher premiums, subject to approval from Irdai.

Insurance companies pay GST on various expenses like commissions, IT systems, office rent, professional services, claims processing, vendor payments, and medical network services. The government, however, assures that the benefit of this exemption will be passed on to consumers.

Insurers are awaiting further clarity on the treatment of input tax credit to make sense of how the exemption may work out. Since they charge 18% GST on insurance premiums, they can claim ITC on these expenses and use it to reduce the GST payable to the government. It is not clear whether the full benefit of this exemption can be enjoyed by policyholders due to the inability of insurers to claim input tax credit.

Some insurers may absorb the loss of revenue, while others may partially pass it on to policyholders. The extent to which insurers can promptly pass on the benefit depends on how soon they receive refunds under the inverted rate structure. The reform may pave the way for broader coverage options, including outpatient services, thereby strengthening the overall healthcare ecosystem.

Krishnan Ramachandran, managing director and chief executive officer of Niva Bupa Health Insurance, hopes that the exemption will be across the entire input chain, enabling insurers to pass on the full benefit to customers. He also highlights that the exemption may not immediately result in a 18% discount, as insurers will forgo the input tax credit they were able to get on GST payments.

The GST Council has also exempted reinsurance premiums from GST. However, there may still be other expense line items where insurers will have to pay GST and will not be able to claim an input tax credit.

The Council hopes to make policies more accessible by removing the GST burden, especially in the wake of rising healthcare costs and growing awareness of the need for risk protection. Bundesfinanzministerin Nirmala Sitharaman, in her support of this tax exemption, aims to offer financial benefits and protection to consumers.

This decision is expected to encourage deeper insurance penetration across the country, provided insurers can promptly pass on the benefit to customers. The impact of this reform on the insurance industry and consumers will become clearer as more details emerge.

Government abolishes Goods and Services Tax on life and health insurance policies, aiming to stimulate further growth in these sectors.