In a move poised to make health and life insurance more affordable for millions of Indians, the Goods and Services Tax (GST) Council is set to deliberate on reducing the GST rate on insurance premiums from the current 18% to 5%. This proposal, aimed at enhancing accessibility and affordability, especially for middle- and lower-income households, is expected to be a key agenda item in the Council’s upcoming meeting scheduled for June or early July.

Background: The Push for Tax Reduction

The proposal to cut GST rates on insurance premiums has been under consideration since September 2024. A Group of Ministers (GoM) led by Bihar Deputy Chief Minister Samrat Chaudhary submitted a report in December 2024 recommending this reduction. The delay in decision-making has been attributed to the need for extended consultations with stakeholders and differing positions among states.

Details of the Proposal

The GoM’s recommendation suggests reducing the GST rate on health and life insurance premiums to 5% with the provision of input tax credit (ITC). This move is anticipated to lower the cost burden on policyholders, making insurance products more accessible. However, it’s important to note that input services are taxed at higher rates of 12% or 18%, which may limit insurers’ ability to fully utilize accumulated ITC, potentially affecting their cost structures.

Implications for Policyholders

A reduction in GST rates on insurance premiums would directly benefit consumers by lowering the overall cost of insurance policies. This is particularly significant given the steady increase in insurance premiums over recent years, which has strained household budgets. Making insurance more affordable could lead to higher penetration rates, especially among populations that have been traditionally underinsured.

Expert Opinions

Tax experts have lauded the proposal, emphasizing its potential to improve affordability and access. Sandeep Sehgal, Partner-Tax at AKM Global, stated, “Reducing the GST to 5%, or ideally making it zero-rated, would significantly improve affordability and access, especially for middle- and lower-income households who need it the most.”

Next Steps

The GST Council’s upcoming meeting will be crucial in determining the implementation of this proposal. If approved, the reduction in GST rates on insurance premiums could be a significant step toward enhancing financial inclusion and providing a safety net for a broader segment of the population.

Conclusion

The proposed reduction in GST rates on health and life insurance premiums reflects a concerted effort by policymakers to address affordability concerns and expand insurance coverage in India. As the Council prepares to deliberate on this critical issue, stakeholders and policyholders alike await a decision that could have far-reaching implications for the insurance sector and the financial well-being of millions.