Impact of GST on Health Insurance Premiums in India: Key Developments and Future Directions

Introduction

The Goods and Services Tax (GST) regime has gained a lot of interest due to its impact on health insurance premiums in India. Health insurance premiums are now subject to an 18% GST, from the previous 15% service tax. The hike raised eyebrows regarding affordability and penetration of the health insurance sector. In order to resolve these issues, the government initiated a review process in the 54th GST Council meeting, held on September 9, 2024.

Key Developments: 54th and 55th GST Council Meetings

Constitution of the Group of Ministers (GoM)

The 54th GST Council meeting also saw the establishment of a 13-member GoM, led by Bihar Deputy Chief Minister Samrat Chaudhary. This GoM also has the mandate of looking into GST-related aspects relating to health and life insurance policies and consists of members from other states like Uttar Pradesh, Rajasthan, Karnataka, Kerala, and Andhra Pradesh to provide a balanced, national perspective.

GoM Mandate

The GoM has a broad mandate, which encompasses:

• Review of GST rates on different types of insurance such as individual, group, family floater, and special groups such as senior citizens and mentally unsound individuals.
• Review of whether GST exemptions or concessions are required in certain products such as term insurance and health insurance for senior citizens.
• Tracking anti-profiteering measures to verify if tax benefit is being transferred to consumers in terms of reduced premiums.

Extended Report Submission Timeline

The GoM was supposed to submit its report by October 30, 2024. During the 55th GST Council meeting on December 21, 2024, however, the GoM requested an extension to finalize its recommendations, citing the subject's complexity and significance.

Current GST Structure and Its Effect

GST Rate on Health Insurance

Health insurance premiums are charged at an 18% rate under the HSN code 997133 and include all policy types—individual, family floater, senior citizen, and critical illness policies.

Exceptions

Certain government-sponsored schemes such as the Universal Health Insurance Scheme and the Niramaya Health Insurance Scheme are exempted from GST to keep the costs low for weaker sections of society.

Industry Issues

Consumer associations and the insurance sector argue that the increased GST rate deters the purchase of health insurance, especially amid rising medical costs and growing awareness in the post-COVID world. Ideas of reducing the GST rate to 5% aim to enhance affordability and drive insurance penetration.

Revenue Issues and State Issues

Revenue Sharing Mechanism

GST that accrues on health insurance is collected jointly by the Centre and state governments, where the state governments receive half of the revenue that accrues and an additional 41% of the portion of central GST. The total collection of GST due from health insurance premia during FY 2023-24 was ₹8,262.94 crore and with an estimated yearly loss to states of approximately ₹4,100 crore if the rate of GST is reduced.

Resistance of States to Implementing Reduction

Most of the states are concerned with lending support to a GST rate reduction in light of the fiscal losses, particularly with the Centre having ceased compensating the states for whatever fiscal shortfalls in GST collection it had been doing in initial years of GST implementation. Even those states which previously had been vociferous in support of a lower GST, such as West Bengal and Karnataka, are now expressing hesitation due to a lack of finances.

Anti-Profiteering Steps and Consumer Relief

Ensuring Direct Gains to Consumers

Serious issues are that the gains from any cut in GST would not be passed on by insurance companies to policyholders unless strict anti-profiteering measures exist. Previous steps taken by anti-profiteering authorities ensured tax reductions passing on by way of lower premiums, but those processes became inactive, triggering doubt about actual consumer gains.

Policyholder Impacts

As an example, a four-member family with the need for ₹15 lakh of health cover will pay over ₹50,000 as premiums, which might not change even with proposed caps or exemptions, thus justifying the need for more targeted policy interventions.

Possible Suggestions and Policy Options Under Consideration

GoM Options Under Review

The GoM is analyzing several suggestions, which include:

• GST exemption on health insurance premium paid by non-senior citizens with an insurance cover up to ₹5 lakh.
• GST exemption on term insurance and health insurance policies specifically designed for senior citizens.
• Reducing GST rates on medical insurance premiums for non-senior citizens from 18% to 5%.

Balancing Relief and Revenue Protection

The government will try to meet the twin needs of relief to consumers and assistance to state treasuries. Firm plans will only be made, however, subsequent to the reports by the GoM and adoption by the Council of the proposals.

Recent Lok Sabha Inquiries and Government Response

Parliamentary Oversight

On 16 December 2024, Unstarred Question No. 3247 was placed before Lok Sabha by Shri Ramasahayan Raghuram Reddy, seeking clarification on anti-profiteering measures, remedies for cutting down revenue loss, and balancing consumer relief. Minister of State for Finance, Shri Pankaj Chaudhary, reiterated that rates and exemptions were decided upon by the GST Council, so no firm commitments could be made until the GoM reported back. Discussions regarding revenue loss and consumer relief were said to be at the initial stage.

What's Next?

Awaiting GoM Recommendations

The insurance sector, policyholders, and governments of states are all waiting with bated breath for the GoM's soon-to-be-made recommendations that would be crucial in shaping future GST policy when it relates to health insurance premiums.

What the GST Council Should Do Next

The GST Council will take the report of the GoM up in a future council meeting, and any revisions to GST rates or exemptions will rest on achieving consensus among members of the Council.

Further In-Depth Reportage Tips

In-Depth Analysis of Impact

Examine how the reduction in GST would impact various segments of society, including middle-class buyers, elderly citizens, and mentally ill patients, with actual examples of premium rates.

International Comparison

Compare India's GST model for healthcare insurance with the advanced economies to give perspective to current discourses.

Anti-Profiteering Authorities' Role

Evaluate previous success with anti-profiteering regulations and address potential frameworks for reinstatement.

Stakeholder Perspectives

Invite inputs from insurance companies, consumer groups, and state finance ministers to achieve a holistic view.

Long-Term Policy Consequences

Reflect on the implications of modifications to GST on insurance take-up, healthcare expenditure out-of-pocket, and the overall mission of universal health coverage.

Government Initiatives and Exemptions

Explain the implications of GST exemptions for government-sponsored health insurance schemes used to assist vulnerable groups.

Technology and Compliance

Explain how GST implementation has promoted compliance and transparency in the insurance business and thereby curbed fraud and enhanced documentation practice.