After the GST council revised the tax rate to zero from 18% on life and health insurance premiums on Wednesday, industry experts openly expressed their apprehensions, saying the government’s move could backfire and make insurance premiums expensive for policyholders.
Now, the Kotak Institutional Equities research has come out with a report suggesting insurance companies may consider revising their tariffs by up to 5% to offset losses on account of the absence of input tax credit.
“A back-of-the-envelope calculation suggests that health insurance companies may need to raise tariffs by 3-5%,” says the report. This will help the companies compensate for the loss of input tax credit that is currently availed of, it added.
The report, however, added that at the same time, a 12-15% reduction in price for the customer can potentially boost health insurance demand.
Individual insurance policies will be exempt from GST
Individual life and health insurance policies, including reinsurance thereof, will be exempt from GST from September 22, 2025. Currently, health insurance policies are taxed at 18%.
Health insurance costs may decline by about 12-15%
The report further said that health insurance costs may decline by about 12-15% (with 0% GST and 3-5% tariff hikes), which may help stimulate demand.
A back-of-the-envelope calculation suggests a 3-5% hike in tariffs (for new and existing retail policies) may be required by health insurance companies to make them margin-neutral, according to the report.
Input tax credit
Companies currently claim ITC on services utilised. These include distribution commissions, reinsurance and promotions/other operational expenses.
“While reinsurance service will also get exempted from GST, companies will continue to pay GST on others. In this calculation, we assume that the benefit of the inverted tax structure (ITS) cannot be claimed by insurance companies since these individual policies are ‘exempt’ and the ITS benefit for insurance is not notified by the government,” it said.