Concerns about health insurance GST cuts
The idea of reducing GST on life insurance seems to be mostly agreed upon, with state finance ministers showing fewer concerns about it. However, the real problem lies with health insurance, and it’s not just about losing revenue. Official are exploring options that could help consumers, but there’s a concern that insurance companies may keep the benefit for themselves and not pass it on to people buying health insurance, a state finance minister told ToI.
Another minister said that although there’s pressure to lower the burden on consumers, companies have been raising premiums ever since the COVID-19 pandemic, citing increased claims. While COVID-related claims have since decreased, insurance companies haven’t given any relief to policyholders. Instead, they claim that the cost of handling claims is still higher than the premiums they collect.
Ministers will make an effort to suggest a formula that cuts the burden on consumers and also ensures that the benefit is not pocketed by companies, he minister told ToI.
Previously, the government had anti-profiteering laws that ensured businesses passed on tax benefits to consumers when GST rates were reduced. These laws allowed authorities to step in and make sure companies didn’t pocket the savings. However, with fewer GST rate changes happening, the government has made these laws inactive. This leaves officials without the power to guarantee that consumers will see lower premiums if the GST is cut.
Many within the government now agree that the 18% GST on health insurance is too high and needs to be reduced. But without an active anti-profiteering body, there’s little assurance that insurance companies will reduce premiums accordingly.
GST on health insurace: Helping only high-premium policies?
One idea on the table is to provide tax relief for policies with annual premiums between ₹50,000 and ₹60,000. However, this may not help most middle-class families. A typical family of four, including two children, often ends up paying around ₹50,000 for a health insurance policy with a cover of ₹15 lakh. But in case of a serious illness, even this amount can be inadequate. For senior citizens, the cost of insurance is much higher due to age and health risks.
Moreover, setting such cut-offs for tax benefits could complicate the GST system, which was originally designed to be simple. Yet, there seems to be a push within the bureaucracy to bring back these kinds of complexities.
States worry about revenue loss from GST cut
The call to lower GST on health insurance gained momentum after Union Transport Minister Nitin Gadkari urged the Finance Ministry to scrap GST on these policies. In his letter, Gadkari pointed out the financial burden on citizens, especially retirees and senior citizens who rely on their savings.
This sparked a wider debate about whether it’s fair to heavily tax something as essential as healthcare. In a country with income inequality and a healthcare system in need of improvement, health insurance is seen as a necessity, not a luxury. Despite this, India’s insurance coverage remains low compared to other countries, and the tax on health insurance only makes it harder for people to afford.
According to a report from NITI Aayog, about 30% of India’s population, or around 40 crore people, don’t have any financial protection for healthcare. This leaves many vulnerable to high medical bills. While the Economic Survey predicts that India’s insurance coverage will rise from 3.8% of GDP in FY23 to 4.3% by FY35, the immediate issue of the 18% GST on health insurance continues to be a burden for consumers.
Even though there’s pressure to lower GST on health insurance, many states are hesitant because of the potential revenue loss. The GST fitment committee, which includes officials from both the Centre and the states, hasn’t been able to agree on a solution. States worry that cutting the tax could result in a major drop in revenue, especially now that they no longer receive compensation from the Centre, as they did in the early days of GST.
Between April 2021 and March 2024, the Centre and states collected over ₹21,000 crore in GST from health insurance premiums. In 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 the GST on health insurance is reduced. Additionally, states receive 41% of the central GST, meaning a further dent in their finances if the tax rate is lowered.
(With ToI inputs)
