The insurance industry has submitted its recommendations for potential changes to GST rates to the Insurance Regulatory and Development Authority of India (IRDAI). These inputs will be forwarded to the GST Council for consideration. Insurers are lobbying for a reduction in the current 18% GST on insurance premiums while retaining the benefits of input tax credit (ITC) for health and term insurance policies.
"In a letter to IRDAI, we have committed to passing on any GST reductions to policyholders after adjusting for input tax credit. The industry strongly supports a GST rate cut with ITC benefits, as insurers bear GST on various business procurement expenses. An exemption is not favorable since it would prevent insurers from claiming input tax credit," stated an official from the insurance sector.
Input tax credit, a mechanism allowing businesses to offset tax liabilities, plays a crucial role for insurers in managing costs. The industry is unanimous in its stance to pass on any tax reductions to policyholders, provided ITC adjustments are maintained.
However, insurers have expressed reservations about a full GST exemption, citing long-term repercussions. "Without input tax credit, a GST rate reduction might lead to short-term premium cuts. However, in the long term, insurers would be forced to raise premiums, ultimately increasing overall costs. This would defeat the purpose of the reduction. Input tax credit is essential for insurers to offset expenses incurred in business operations," explained the Head of Health Business at a leading general insurance company.
In FY24, the GST revenue from health insurance premiums alone amounted to Rs 8,000 crore. To address affordability, a Group of Ministers (GoM) recently proposed exemptions on GST for health insurance premiums for senior citizens and policies with coverage up to Rs 5 lakh. Additionally, the GoM suggested tax exemptions for individual term life insurance policies.
Finance Minister Nirmala Sitharaman emphasized the importance of IRDAI's input during the December GST Council meeting, signalling that the suggestions on GST revisions and rate rationalization will be a key agenda in the upcoming January GST Council meeting.
As the industry awaits the GST Council's decision, insurers have reaffirmed their commitment to balancing affordability for policyholders with operational sustainability through ITC retention.
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