Why dither over GST on insurance?

The GST Council’s (GST-C) decision last week to yet again defer discussions on lowering the Goods and Services Tax (GST) on insurance premiums is frustrating to the middle class which sees no justification for taxing a derisking investment on par with consumption expenditure. It also begs the question why the government should have any second thoughts about making insurance, especially health insurance, more affordable and accessible to the people. The GST-C on December 21 chose to postpone this long-awaited decision, citing the need for further discussions among its members.

The Group of Ministers (GoM) constituted to study the proposal had already, in November, recommended a complete waiver of GST on health insurance premiums for policies covering up to Rs 5 lakh and suggested reducing the tax rate for term life insurance policies. The next GoM meeting is scheduled for January 2025, where these matters will be revisited. It’s not clear what new data will emerge from now to then that might further enlighten the council. The reason given for the deferment sounds specious.

Finance Minister Nirmala Sitharaman has said the GoM is awaiting inputs from the Insurance Regulatory and Development Authority of India. It’s quizzical to say the least that the GoM made its November recommendations without taking inputs from the apex regulator of the business. Hopefully, revenue considerations will not weigh too heavily with the GoM when it meets next month.

The government raked in Rs 16,398 crore from GST on insurance premiums in FY 2024, with life and health contributing Rs 8,000 crore each. The fact that these accruals increased by 680 per cent since the pre-pandemic year attests to the sober realisation among the Indian people that adverse health outcomes can be ruinous to them and their families. The necessity to lower GST on insurance, especially health insurance, cannot therefore be overstated.

Currently, health as well as life premiums are taxed at a rate of 18 per cent. This high rate significantly curtails the affordability of risk cover for the majority of tax-paying Indians, not to speak of lower-income citizens who cannot afford life cover at any rate and are not served adequately by the state-mediated health cover currently in force. Healthcare costs in India are increasing 14 pc annually, having risen 200 per cent in the past 10 years. Out-of-pocket expenditure (OOPE) on healthcare remains high.

Although the Centre says it has declined from 64.2 pc to 39.4 pc in the past 10 years, few analysts give the rosy numbers any credence. Private insurers estimate the OOPE figure at a whopping 62 pc, with 23 pc of hospital costs funded through borrowings. Not only is the high rate of taxation on insurance adding to the financial strain on families but it also deters many from buying cover.

A reduction in GST will make risk coverage more accessible to a broader segment of the population. India’s insurance penetration, measured as the percentage of premiums to GDP, is low compared to global standards.

As per IRDAI, it stands at 4 pc against the global average of 6.8 pc. While there is consensus on the need to bring down the rates paid on insurance premiums, the GST-C is said to be snagged over technicalities, such as giving a waiver to senior citizens while making the others pay. This is classical Indian policy quibbling that punishes the middle class while purporting to protect, inadequately and poorly, other demographic classes.

A sweeping all-comers waiver will ease the burden on all classes of family significantly and bring many thousands more into protective cover.