GST changes on insurance – is it a big deal?
The Goods and Services Tax (GST) Council is expected to meet soon (June or early July) with a proposal that could significantly impact both policyholders and insurers. A potential reduction in GST on health and life insurance from the current 18% to just 5% with input tax credit (ITC).
What it means for policyholders
If you’ve bought a health or life insurance policy, you must have noticed how much the 18% GST inflates the premium. This tax burden, on top of rising premiums (especially in health insurance), makes insurance unaffordable for many middle and lower-income families.
Reducing GST to 5% could significantly improve affordability especially for those who most need it, helping reduce India’s protection gap.
But what about the insurance companies?
The decision to lower GST is not so straightforward. While reduced GST makes insurance more attractive to customers, it also complicates things for insurers especially when it comes to “input tax credit (ITC).”
Most of the services insurers use IT systems, call centers, marketing, etc. which are taxed (input tax) at 12–18%. If the output tax (what insurers collect from customers) drops to 5%, but input taxes remain higher, insurers won’t be able to fully claim their input tax credit. This results in a cost mismatch that insurers may have to absorb.
To balance this, many insurers have proposed a 12% GST rate with ITC benefits instead of a flat 5%. This would allow them to maintain affordability for customers while still recovering their own costs.
A balancing act
The GST Council has a tricky job ahead. On one hand, lowering GST on insurance helps it reach more people. On the other, slashing the rate too low, without adjusting input tax credit rules, could strain insurers’ bottom lines.
Some states have even pushed for complete GST exemption on insurance, but that too comes with a catch: insurers wouldn’t be able to claim ITC at all, and those costs would likely be passed on to the customer.
This is why the Council is weighing multiple options, including the findings of the IRDAI’s own recommendations on premium taxation.
In summary
Customers will benefit through lower premiums, making health and life insurance more accessible.
Insurers may face cost pressures due to reduced ITC utilisation.
Any tax benefit must be passed on to policyholders, as per regulatory expectations.
If we are serious about “Insurance for All by 2047”, insurance affordablity through GST reform is an essential step.
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