GST exemption on insurance may not cut premiums without input tax credit, say experts

GST exemption on insurance policies

The GST group of ministers (GoM) has proposed exempting health and life insurance premiums from the levy to make insurance products more affordable and improve penetration in India’s underinsured market.

Experts, however, caution that the move may not translate into a proportional reduction in premiums unless insurers are allowed to retain input tax credits.

The GST exemption on insurance policies is a welcome move, as it reduces the burden on policyholders and makes insurance more affordable. This benefit will hold true only if the exemption is accompanied by the availability of input credit for insurance companies, Rushabh Gandhi, MD and CEO, IndiaFirst Life, said.

“Without it, the additional cost from input credit reversal will likely be factored into the pricing of insurance policies, offsetting a large part of the intended relief for customers,” Gandhi said.

The final decision will be taken by the GST Council after wider consultations with states, Bihar deputy chief minister and convener of insurance GoM Samrat Choudhary said. States have flagged potential revenue losses if insurance is exempted from GST.

Reliance General Insurance CEO Rakesh Jain said, “Removing the 18 percent tax burden will directly benefit middle-class households, senior citizens, and vulnerable sections of society who often view premiums as a financial strain. Reducing the cost barrier will encourage more people to adopt health insurance, thereby strengthening the country’s overall social security framework.”

While the reform can be a game-changer, operational challenges remain with issues like the inverted duty structure and unutilised input tax credits that can increase costs. “Without addressing these inefficiencies, insurers may still face margin pressures even if customers see some relief,” Jain said.

Even as this GoM recommendation has raised questions regarding the breadth of coverage of the products category and the implications for Input Tax Credit, one thing that is clear is that prices of retail health and life insurance products will come down for customers and any benefits from GST cuts must be passed by insurers to customers, Emkay Global said.

The industry has welcomed the Centre’s proposal to exempt health and life insurance premiums from the 18 percent GST. "It is an overdue measure that is both customer-friendly and poised to expand insurance penetration. This encouraging development marks a long-awaited step in the right direction, making essential financial protection more accessible to individuals across the nation,” said Sarbvir Singh, Joint Group CEO of PB Fintech.