How the government is overtaxing you for the GST bounty on your insurance

The high 18% GST on life and health insurance premiums in a country like India, where insurance penetration is low, defies logic. Furthermore, there is no social security net in India, and government medical facilities are rickety. Why does the government charge 18% GST on insurance products, and why does this need to be done away with?

This is a pinch we all feel every time we pay the premium for our life and health insurance policies. The prohibitive 18% Goods and Services Tax (GST) adds to the already high premium that insurers are charging. In a country like India, where insurance penetration is low, the high tax rate discourages people from getting insured or opting for higher cover. 

This over-taxing of the people comes even as the government has been raking in higher GST collections month after month. It was Union Road Transport and Highways Minister Nitin Gadkari who recently stirred the hornet's nest by seeking the elimination of the 18% GST on life and health insurance premiums.

In a letter to Finance Minister Nirmala Sitharaman, Gadkari said taxing these premiums equates to "taxing life's uncertainties" and hinders the growth of the insurance sector. In a country where there is no social security net and government medical infrastructure is rickety, the high 18% GST on life and health insurance premiums defies logic.

The GST regime came into effect on July 1, 2017. For years now, the GST Council has been talking about reviewing the rates but has not made any move towards it, despite the high collections. In June 2024, India's gross GST collection stood at Rs 1.74 lakh crore, an 8% year-on-year increase.

Not only Nitin Gadkari, but even the Standing Committee on Finance, headed by Jayant Sinha, also recommended that the GST rate on insurance products, especially term and health, be reduced. In 2021-22, insurance penetration (percentage of insurance premium to GDP) in India was 4.2% as compared to the global average of 7%, the standing committee report said. It noted that there was a need to create mass awareness about the need and benefits of having insurance protection and diverse insurance products.

The high rate of GST results in a high premium burden, which acts as a deterrent to getting insurance policies, the committee's report, submitted in February, observed. "India's insurance penetration, at 30%, remains relatively low compared to developed countries, like the US, where it is over 90%," Rupinderjit Singh, Senior Vice President with ACKO insurance company, tells IndiaToday.In.

The low penetration and high insurance cost ultimately result in high out-of-pocket expenses for medical emergencies. "According to the Global Interfaith Council, India has 62% out-of-pocket expenditure compared to 10% in the US," says Singh, adding, "Healthcare remains one of the primary reasons for a family to end up back in poverty."

"The government’s logic of imposing GST can be seen from the lens of an avenue to generate revenue," ACKO's Singh tells IndiaToday.In. He explains how the government needs ways to broaden the tax base as just 2 crore Indians pay income tax.

The GST regime aims to create a uniform structure across goods and services. Insurance is considered a financial service and is charged at an 18% GST rate. Most experts think that the GST rates should be rationalized for different segments if the tax isn't done away with completely. "In our opinion, there should not be a complete removal of taxes. Instead, the tax should be linked to the annual premium and the type of insurance product," says Sandeep Katiyar, Co-Founder and CFO of financial services platform Finhaat.

"Taxes on premiums for individuals at the bottom of the economic pyramid or senior citizens should be eliminated. For other income segments, the tax should be lower on pure-term plans and medical insurance premiums," Katiyar tells IndiaToday.In. 

The government gives tax exemption under 80C for life and 80D for health insurance is no defense for the exorbitant rate charged on insurance premiums. The annual report by the Insurance Regulatory and Development Authority (IRDAI), India's insurance regulator, said there had been a 2.21% fall in the number of new life insurance policies issued in 2022-23 as against the previous year. 

The IRDAI report shows that while insurance penetration fell, the premium payout by people went up. IRDAI quotes a report by Swiss Re Sigma to say that insurance penetration of the life insurance sector reduced from 3.2% in 2021-22 to 3% in 2022-23. For the non-life insurance sector, penetration stagnated at 1%. Though penetration dipped, the IRDAI report said life insurance premium collection went up 13% to Rs 7.83 lakh crore in 2022-23 from a year ago. 

Almost 53% of the premium income of the life insurance industry is from renewal premiums, while 47% is from new business premiums. This too could be a marker of fewer people going in for insurance coverage. 

What high premiums and the additional 18% GST are doing is limiting people from going for higher insurance covers. "Many users do settle for a smaller cover due to high premiums. In India, the premium cost is a crucial factor when selecting a health insurance plan," says Rupinderjit Singh of ACKO. 

"Customers often have limited budgets, which leads them to choose lower cover plans that fit within their financial constraints, even if it means reduced coverage," adds Singh. He says the exemption of GST on health insurance will be a big boost and help get sufficient coverage at affordable prices. 

Premium payment capacity is directly linked to disposable income, which is limited for the poor and lower-middle-class segments, says Sandeep Katiyar of Finhaat. "If premiums decrease due to lower taxes, individuals in these groups will be able to obtain higher coverage," he adds.

Therefore, it is high time that the GST Council moves to rationalize, if not eliminate, the 18% GST rates on life and health insurance premiums. This will boost insurance penetration in India and help people go in for higher coverage.