GST ON HEALTH AND INSURANCE (Syllabus: GS Paper 3 – Economy)

Context: Insurance companies have raised premiums on health and life policies this year, exacerbating affordability issues due to the additional 18% Goods and Services Tax (GST).

GST on Health and Life Insurance Premiums

• GST Introduction and Rate: GST replaced all indirect taxes from July 1, 2017, and is currently fixed at 18% for health and life insurance premiums.
• Impact of GST on Premiums: Before GST, insurance premiums were subject to 15% service taxes. The GST rate increase to 18% led to higher premiums for policyholders.
• Medical Inflation Effect: Rising medical costs, with medical inflation estimated at 14%, have further increased the difficulty of purchasing medical insurance.
• Government Acknowledgment: The government has received requests for a reduction or exemption from GST on life and health insurance premiums.
• GST Council Role: GST rates and exemptions are set based on the recommendations of the GST Council, which includes the Union Finance Minister and state/UT ministers.
• Revenue from GST: The insurance sector contributes significantly to government revenue, with Rs 21,256 crore from GST over the last three years and Rs 3,274 crore from reissued health policies.
• Income Tax Deductions: Tax-saving deductions on insurance premiums are available under Sections 80C and 80D of the Income Tax Act, 1961, including GST.
• Scepticism about GST Reduction: There is scepticism about whether a potential reduction in GST would benefit policyholders, with concerns about whether insurers would pass on the benefits.

Current Scenario

• Life Insurance Market Size: Life insurance companies mobilised Rs 3,77,960 crore in premiums in FY2024, with LIC contributing Rs 2,22,522 crore.
• In 2022-23, five states: Maharashtra, Karnataka, Tamil Nadu, Gujarat, and Delhi — contributed approximately 64% of the total health insurance premium, while the remaining 36% came from other states.
• Insurance Penetration Trends: Insurance penetration in India's life insurance sector decreased from 3.2% in 2021-22 to 3% in 2022-23, and non-life insurance penetration remained at 1%. Consequently, overall insurance penetration dropped to 4% in 2022-23 from 4.2% in 2021-22.