Why zero-per-cent GST on insurance policies may hurt more than help

Removal of the Goods and Services Tax (GST) on insurance policies may pose a challenge for the insurers. Experts believe that full exemption would lead insurers to lose the Input Tax Credit (ITC), which they currently utilise to reduce their backend costs such as systems, call centres, and distributors. 

A zero-per-cent GST may seem more appealing, as there is no tax to pay at all. However, with a full exemption, insurers would lose the ITC. “The proposal to exempt GST on life and health insurance premiums is a commendable move aimed at increasing affordability and coverage. However, its effectiveness will depend upon the implementation design, including the ability to avail ITC by the companies," says Jignesh Ghelani, partner, Dhruva Advisors.

If GST is completely removed, insurers would no longer have the option to claim ITC on the GST they pay on their purchases (e.g., IT systems, advertising, third-party services). This loss would increase their operating costs, as they can no longer offset these expenses.

Gautam B. Boda, group vice chairman of J.B. Boda Group, states, "Insurers may increase the base premium to offset higher costs, which could cancel out the benefit of GST removal for consumers. The immediate decrease in premiums is unlikely unless the government mandates a pass-through of benefits. Therefore, while GST exemption appears to be pro-consumer, the loss of ITC can pressure insurers’ margins or lead to premiums being recalibrated to recover costs."

No ITC means higher costs, which could lead to increased base premiums. “Health insurance companies operate on thin margins, so these changes are significant. The ideal situation is for GST to be removed, but ITC should still be accessible to insurers," says Naval Goel, CEO of PolicyX.com.

A balanced solution 

However, insurance experts generally suggest that lowering the rate to 5% with ITC retention is a more balanced and practical approach. "Keeping 5% GST would reduce the tax burden for consumers from 18% to 5%, making premiums more affordable. Also, allow insurers to retain ITC benefits and avoid increasing the policy costs. This will further reduce administrative complexity, since insurers remain within the GST framework. Minimise pricing distortions or the need to significantly adjust premiums. Thus, this maintains industry efficiency while enhancing consumer affordability, a win-win," explains Boda.

Echoing similar views, Goel says, "If GST is reduced to 5% and insurers keep the ITC option, everyone wins: customers pay less tax (only 5% instead of 18%), and insurers still offset their costs with the ITC, so they don't have to increase base prices. This creates a more balanced and realistic way of doing business."

Making GST relief count

To ensure benefit for consumers, the government can take several steps, including mandating premium disclosures, thus requiring insurers to display pre- and post-GST pricing transparently, and allowing regulators and customers to verify whether benefits are passed on.

"Insurance regulator Irdai must conduct regular audits or seek actuarial justifications for any changes in base premiums. Standardised pricing benchmarks, the government or Irdai can publish reference pricing models or rate bands after GST changes, to discourage unjustified hikes," says Boda.

Additionally, there should be consumer awareness campaigns to educate consumers about what to expect and demand when GST is removed or reduced. If one insurer passes the savings on to the consumer, other insurers must also act competitively, and the costs will ultimately be transferred to the consumer. "This process would ensure that customers can benefit from reduced premiums directly, allowing for transparency and accountability," says Goel.

Thus, if executed properly, GST relief can become the catalyst to increase penetration and provide financial security for families in India.