The Debate Over GST on Health Insurance

Sub: Eco

Sec: Fiscal Policy

Context:

Opposition leaders are demanding the withdrawal of GST on life and health insurance premiums.
The rise in insurance premiums, combined with the 18% GST, has made insurance less affordable for many people.

Current GST on Insurance Premiums:

GST Rate: Fixed at 18% on both health and life insurance policies.
Pre-GST Scenario: Insurance premiums were subject to 15% service taxes (comprising Basic Service Tax, Swachh Bharat cess, and Krishi Kalyan cess).
Impact: The transition to GST increased the overall premium costs for policyholders.

Government’s Position:

GST Council’s Role: GST rates and exemptions on services are recommended by the GST Council, which includes the Union Finance Minister and state ministers.
Revenue Considerations: The insurance sector has contributed significantly to GST revenue (Rs 21,256 crore over the last three financial years).

Arguments for Reducing or Removing GST:

Affordability Issues: High GST rates add to the premium burden, making insurance less affordable, especially amidst rising medical inflation.
International Comparison: Countries like Singapore and Hong Kong have no GST or VAT on insurance, making insurance products more accessible.
Recommendations: The Standing Committee on Finance recommended rationalizing GST rates on insurance to make them more affordable, particularly for senior citizens and microinsurance policies.

Industry Perspective:

Insurance Companies: Rising retail and medical inflation have increased overall costs, leading to higher premiums.
Consumer Impact: Frequent premium hikes and high GST rates deter people from renewing or purchasing new insurance policies.

Market Statistics:

General Insurance: Collected Rs 1,09,000 crore premium under the health portfolio in fiscal 2023-24.
Life Insurance: Mobilized Rs 3,77,960 crore premium in FY2024, with LIC alone accounting for Rs 2,22,522 crore.
State Contribution: Five states contributed about 64% of the total health insurance premium in 2022-23.
Insurance Penetration: Reduced to 4% in 2022-23 from 4.2% in 2021-22.

Future Prospects:

Goal: Achieving “Insurance for All by 2047” requires making insurance products more affordable.
Public Expectation: Measures to reduce GST on insurance could align with this goal, making life and health insurance accessible to a broader population.

GST Council’s Role and Functions

Introduction:

GST Council: The Goods and Services Tax (GST) Council is a constitutional body under Article 279A of the Indian Constitution.
Purpose: It is responsible for making recommendations on GST-related matters to the Union and States.

Composition:

Key Functions:

Tax Rates: Recommendation of GST rates on various goods and services.
Exemptions: Proposing exemptions from GST for certain goods and services.
Threshold Limits: Setting threshold limits for GST registration.
Model GST Laws: Formulating and recommending model GST laws, principles of levy, apportionment of GST, and the principles that govern the place of supply.
Special Rates: Advising on special rates for certain supplies to raise additional resources during natural calamities or disasters.
Voting: Decisions are made by a three-fourths majority of members present and voting.

The Union Government’s vote counts as one-third of the total votes, and the State Governments’ votes count as two-thirds.