GST on Insurance Premiums May Be Reduced to 5% with Input Tax Credit
The Goods and Services Tax (GST) Council is contemplating a significant reduction in the GST rate on health and life insurance premiums from the current 18% to 5%, while retaining the benefit of input tax credit (ITC). This proposal aims to make insurance more affordable for consumers, particularly middle- and lower-income households, without compromising the financial viability of insurance providers.
Balancing Consumer Relief and Industry Sustainability
A complete exemption from GST was considered; however, it was found that such a move would prevent insurers from claiming ITC on their input costs, potentially leading to higher premiums due to unclaimed tax credits. By reducing the GST rate to 5% and allowing ITC, the Council seeks to strike a balance between affordability for policyholders and operational sustainability for insurers.
Industry Perspectives and Concerns
While the proposed reduction is welcomed by many, some stakeholders in the insurance industry have expressed concerns. They argue that a 5% GST rate might still result in unutilized ITC, suggesting that a 12% rate could be more practical to ensure full utilization of tax credits. Despite these concerns, the consensus leans towards the 5% rate with ITC as a viable solution to enhance insurance penetration and financial inclusion across various economic segments.
Next Steps
The GST Council is scheduled to meet in the coming months to discuss this proposal, among other tax rationalization measures. If approved, the reduced GST rate on insurance premiums could lead to more affordable insurance products, encouraging broader adoption and providing greater financial security to a larger portion of the population.
