Industry Leader Warns Negative Implication of GST Rate Cut on Life and Health Insurance

The government is reportedly seeking a significant reduction in Goods and Services Tax (GST) on health and life insurance, from the current 18% to as low as 5%, or even zero. This upcoming change is part of a broader GST reform package that may also include cuts on small cars.

Industry Leader Not Happy with Change

The insurance industry leaders caution that slashing GST without retaining the Input Tax Credit (ITC) mechanism could backfire. Under current rules, insurers can offset the GST they collect from policyholders by claiming credit for the GST they pay on operational expenses such as IT services, administrative overheads, and more. Removing this credit could inflate insurers' costs, potentially leading to higher premiums rather than reduced ones.

As per news reports, a zero or 5% GST rate without ITC would severely squeeze profit margins and leave no room for premium reductions, undermining the very goal of making insurance more affordable.

What Will be the Change?

• 18% GST with ITC (Current Regime): Allows insurers to manage operational costs and, in some cases, pass on benefits to consumers.
• 5% or 0% GST without ITC: Could result in increased costs due to blocked credits, potentially pushing premiums higher.
• 12% GST with ITC: Viewed by many in the industry as a balanced approach—offering moderate tax relief while preserving credit mechanisms and financial sustainability.

While the government's intention is to make health and life insurance more accessible, industry experts warn that eliminating ITC could raise operating expenses and ultimately harm consumers through higher pricing.

A growing number within the sector are advocating for a middle path: a reduced GST rate, possibly 12%, with full ITC access. Such a move, they argue, would strike a balance between affordability for policyholders, financial viability for insurers, and revenue stability for the government.

Also Read: GST Rate Cuts Expected: Cement, 2-Wheeler, FMCG & Consumer Durable Stocks That Could Gain from New Tax Reforms

Conclusion

The final call now lies with the GST Council, which is expected to weigh economic, fiscal, and consumer implications before finalising the reform package, likely to be announced by October.

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