Despite the low penetration of life and health insurance in the country and the heightened medical concerns driven by the pandemic, the GST council is not likely to provide tax relief to those seeking life or medical insurance cover.
India Today found out that the fitment committee, a panel of central and state government officials working for the GST Council, rejected a proposal to lower the tax rate on premiums paid on a slew of insurance policies from life to health to third parties.
The agenda documents accessed from the GST council show that the fitment committee recommended “no change” to the request to remove the GST on life and health insurance. There is an 18% GST imposed on life and health insurance currently.
The GST at present is of three types. The first is the GST on Insurance Risk premium, the second is GST is collected on late fee and delayed loan interest paid due to a delay in payment of premium and interest on time. Third is the GST imposed on annuity policies which don’t contain any risk premium. GST is not collected on investment in banks, post office savings schemes, etc.
The request for removal of GST on health insurance is backed by the argument that the 18% GST on policies is hampering penetration, which is the need of the day. The request states, “If one wants to invest Rs 1 lakh per year in health insurance his premium would be Rs 1,18,000 every year and this huge amount of GST is discouraging the prospect of getting it.”
However, the fitment committee backed the continuation of the tax levied on health insurance by saying that “this is a new exemption request and exemption or lowering the GST rate will lead to cascading of input taxes and result in distortion of the tax structure.”
The GST council forwarded the request for reduction or removal of taxes on health insurance for examination to the fitment committee. Usually the fitment committee examines proposals for changes in rates for goods and services and accordingly recommends a yes, no or defer. The recommendations are taken up by the GST Council for approval and these are implemented through legislative changes and subordinate legislation by the Centre and states or union territories.
The Baseline rate for GST for life insurance is 18 per cent, but for the first premium it is 4.5 per cent and for second and onward premiums, it is 2.25 per cent. For single premium policies, it is only 1.8 per cent.
However, in the case of health insurance premiums, the 18% GST slab is applicable.
HEALTH INSURANCE IN INDIA
The demand for reduction and removal of GST has been around for some time now due to the low penetration of health cover in India, where a large segment of the population ends up depending on the government’s health care system.
According to Statista a leading provider of market and consumer data nearly 51.4 crore people across India were covered under health insurance schemes in the fiscal year of 2021. Of these, the highest number of people were insured under government-sponsored health insurance schemes, while individual insurance plans had the lowest number of people. Overall, the penetration of health insurance in India stood at just around 35 percent in the financial year 2018.
Government-operated insurance schemes such as the Rashtriya Swasthya Bima Yojana (RSBY), Universal Health Insurance Scheme, Jan Arogya Bima Policy and Niramaya Health Insurance Scheme which cater to almost 34.2 crore people in the economically weak and differently abled category, are already exempted from GST.
The group business insurance policies, excluding those provided by state governments, cover 11.8 crore people while only 5.3 crore Indians have individual health insurance policies as per Statista.
The GST council had taken up representations demanding a cut in GST on health insurance at its 31st meeting held on December 22, 2018. In its 37th meeting held on September 20, 2019 the request to reduce GST on term insurance premiums was taken up but it was not acceded to by the Council.
PROPOSALS IN GST MEET
Another request to exempt GST on personal lines of insurance was also turned down by the fitment committee. The request stated that GST on insurance based on personal lines like medi-claim, householder’s policy, personal accident policy may be withdrawn as most of the insured are paying tax on their income and GST is an added expenditure.
The committee again noted that this is a request for new exemption and exempting GST on a particular line of insurance would be against the fundamental tenets of GST and ITC on inputs would stick as cost to insurers. The rejection is through a recommendation that the request may not be accepted.
There was also a proposal to provide blanket exemption for general micro-insurance products which include health insurance contracts and any contract covering belongings such as hut, livestock, tools or instruments and any personal accident contract that can be on an individual or group basis.
Life micro insurance products involving insured amount up to Rs 2 lakh are already exempt from GST and there was a demand to extend it to general insurance products too. The committee, however laid down that since some of such general micro-insurance products are already exempted, there is not much merit in granting a blanket exemption.
A proposal for exempting third party insurance for commercial vehicles has also been set aside. The request said that the mandatory third-party premium on heavy goods vehicles has been abnormally increased over the past few years and is high though the category wise share of accidents from trucks as per the ministry’s data is far less. It also argued that no ITC for GST is claimed by the majority of truck operators and data reveals that the majority of privately owned 2/3/4 wheelers are not getting the insurance renewed.
The fitment committee argued that accidents involving commercial vehicles like trucks are few and in most instances operators do not claim ITC for GST. The committee felt that the rate has already been lowered to 12 from 18 per cent. Further reduction will result in revenue and loss and distortion of ITC (Input Tax Credit) chain. The committee laid down that the GST rate of 12 per cent is applicable on the premium of third-party insurance for goods carriage at present w.e.f. 1.1.2019. It added that a similar request to reduce the GST on third party insurance was not acceded to by the council in its 37th meeting.