A proposal to exempt health insurance policies from the 18 percent goods and services tax (GST) could deal a Rs 3,500 crore blow to government revenues annually, according to a senior official who is part of the Fitment Committee considering the plan ahead of the GST Council’s September 9 meeting.
“If we exempt full health insurance, the loss will be almost Rs 3,500 crore. Exemption of health insurance from GST, if approved by the Council in the meeting on September 9, will cause a huge revenue loss,” the official said, requesting anonymity.
The Fitment Committee, comprising state and central government revenue officials, is tasked with weighing the potential benefits of relieving consumers of a significant financial burden against the revenue loss to the exchequer and making recommendations to the council. The council — chaired by Finance Minister Nirmala Sitharaman and comprising state finance ministers — will take a final call on the matter.
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“The proposed exemption of health insurance from GST, if approved, could result in a significant annual revenue loss for the exchequer. Additionally, this exemption would render the insurance sector ineligible for input tax credits, leading to an immediate increase in the cost of servicing insurance policies. The reduction in taxes might partially offset the increased costs. However, the exact balance between these factors is difficult to determine at this stage,” said Rajat Mohan, Executive Director at tax consultant Moore Singhi.
The potential benefits of such an exemption are also under discussion. Some experts believe that making health insurance more affordable could increase its appeal among consumers.
However, the associated rise in costs due to the loss of input tax credits could act against these benefits, potentially dampening consumer enthusiasm.
“The government is walking a tightrope with discussions on exemption of health insurance from GST. On one hand, it will result in a huge revenue loss to the government, while on the other hand, exemption from GST will make insurance more affordable to the public at large and also increase market penetration,” Anchal N. Arora, Partner at Felix Advisory, told Moneycontrol.
Earlier, Union Minister for Road, Transport, and Highways Nitin Gadkari, also batted for health insurance’s exemption from GST. On June 28 — days after Sitharaman tabled the Union Budget in the Lok Sabha on July 23 — Gadkari appealed to the finance minister for the withdrawal of GST on life and medical insurance premiums. He emphasised how taxing these essential services restricts their accessibility and growth.
“The 18 per cent GST on medical insurance premium is proving to be a deterrent for the growth of this segment of business, which is socially necessary,” stated the letter.
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