India’s life and health insurers say a full GST exemption on premiums would force them to pass the 18% tax on various input services to policyholders, defeating the purpose of the relief.
The Group of Ministers (GoM) on Goods and Services Tax (GST) on Wednesday proposed exempting health and life insurance premiums from the levy.
Exemption may add cost burden
“If the entire health insurance premium is exempt, then there is no output GST at all. Currently, we pay 18% GST on various input services such as auditor fees, administrative expenses and office rent. If GST is fully exempt, the credit can no longer be set off and will sit in the P&L as an added cost,” said a senior official at a private general insurer.
Industry prefers rationalisation
While the GoM’s recommendation will be taken up by the GST Council in early October, Hemik Shah, co-founder of Qian Insurance, said the benefit of a GST rate reduction for policyholders will depend on whether health and life insurance services are classified as ‘nil rated’ or merely ‘exempt’.
According to Shah, if the services are considered exempt, input tax credit will not be available and the savings from a rate cut will be offset by higher premiums. “If health and life insurance services are classified as ‘zero rated’ or ‘nil rated,’ credit will be available and can be used to set off GST liability of other lines of business,” he added.
A GST rate cut to 0% would impact retail-focused standalone health insurers the most. Star Health, for instance, derives over 92% of its premium from retail health, while Niva Bupa Health and Care Health each draw around 60% from this segment.
“A senior official at a private life insurer said the industry still hopes the GST rate will be rationalised to 5% rather than fully exempted. ‘Even at 5%, a mismatch remains as input costs are taxed at 18% while output is taxed at 5%, limiting the ability to claim full input credit. If input costs stay at 18% and output is fully exempt, we have no choice but to pass the burden to customers,’ the official said.”