Why the Insurance Industry Isn’t Happy About the ‘Nil’ GST Proposal
At first glance, the idea of removing GST on insurance
premiums may sound like good news for policyholders. After all, it would make
insurance policies cheaper, right? But the reality is more complicated.
Industry experts, insurers, and financial analysts argue that a nil GST regime
may do more harm than good, creating long-term challenges for both insurance
companies and policyholders.
In this article, we will explore why the insurance industry
is worried about the proposal, what it could mean for customers, and how
policymakers can strike a balance.
Current GST Structure on Insurance
Insurance premiums in India currently attract 18% GST. This
applies to most types of insurance, including life, health, motor, and general
insurance. For example:
If your health insurance premium is ₹20,000 per year, you
pay an additional ₹3,600 as GST.
If your motor insurance premium is ₹10,000, GST adds ₹1,800
on top.
For customers, this makes insurance more expensive. For
insurers, it means they must deal with higher compliance and ensure accurate
tax collection.
The proposal for ‘nil GST’ on insurance products has been
raised with the intention of making policies more affordable, especially for
middle-class and low-income groups. However, insurers see risks in this move.
Why the Insurance Industry Opposes the ‘Nil’ GST Proposal
1. Loss of Input Tax Credit (ITC)
One of the biggest concerns is the potential loss of Input
Tax Credit (ITC).
Currently, insurance companies pay GST on various services
they use—advertising, IT systems, outsourcing, medical networks, and office
expenses. They then claim ITC to offset the GST collected from policyholders.
If GST on insurance premiums becomes nil:
Insurers will still pay GST on services they consume.
But they won’t be able to claim ITC since they won’t be
collecting GST from customers.
This will directly increase operational costs for insurers.
As a result, insurers may pass on higher costs to customers
indirectly, making premiums expensive in the long run despite the nil GST move.
2. Impact on Government Revenue
Insurance contributes significantly to India’s GST
collections. If premiums are exempted from GST:
The government could lose thousands of crores in annual
revenue.
This shortfall might force the government to increase taxes
elsewhere, indirectly impacting citizens.
Thus, while customers may initially benefit, the broader
economy may face challenges.
3. Distortion of Tax Neutrality
One of the primary goals of GST was to ensure tax
neutrality—where businesses don’t suffer from cascading taxes. A nil GST on
insurance breaks this chain.
For example:
Hospitals, third-party administrators, and IT vendors will
charge GST to insurers.
Insurers cannot claim credit for these costs.
This results in double taxation, which was the very problem
GST was meant to solve.
4. Hidden Premium Hikes
While customers may expect cheaper insurance with nil GST,
insurers warn of the opposite. Since companies will lose ITC, they may adjust
premiums upward to cover the gap.
Imagine this scenario:
Current premium: ₹10,000 + ₹1,800 GST = ₹11,800
Under nil GST: Premium might be revised to ₹11,200 (to
absorb input costs)
So instead of big savings, customers may see only marginal
benefits.
5. Compliance and Operational Challenges
Insurance is already a heavily regulated industry. A shift
to nil GST could require:
Changes in billing systems
Adjustments in accounting processes
Restructuring contracts with hospitals, agents, and service
providers
This could add new administrative burdens for insurers at a
time when they are already investing heavily in digital adoption and customer
service.
6. Global Practices
Globally, most countries tax insurance services in some
form. For example:
In the UK, a 12% Insurance Premium Tax (IPT) applies.
In European Union nations, VAT exemptions exist, but
insurers cannot claim ITC, making operations costlier.
India moving towards nil GST could create similar
inefficiencies as seen in Europe.
What It Means for Policyholders
While the proposal appears customer-friendly, policyholders
should understand its implications:
Short-term benefit, long-term cost – Premiums may
reduce slightly initially, but insurers could revise rates upward later.
Reduced innovation – Higher operational costs may
discourage insurers from introducing new, affordable products.
Slower claim settlement – If insurers cut costs to
manage losses, service quality might get impacted.
Limited tax benefits – Currently, GST paid is part of
your premium, which indirectly strengthens government revenue. With nil GST,
tax deductions on insurance (like under Section 80C or 80D) may remain, but the
ecosystem weakens.
Industry Suggestions Instead of Nil GST
The insurance industry is not against reforms. In fact,
insurers agree that making insurance affordable is essential for increasing
penetration. But they believe there are better alternatives than nil GST, such
as:
1. Lower GST Rate Instead of Nil
Instead of removing GST entirely, experts suggest reducing
it from 18% to 5% or 12%. This would:
Make premiums more affordable.
Allow insurers to continue claiming ITC.
Maintain revenue flow for the government.
2. Special GST Exemptions for Essential Insurance
Health insurance, especially family floater and senior
citizen plans, could attract a lower GST slab.
Life insurance products with low sums assured could be given
relief.
This targeted approach avoids hurting the entire sector.
3. Incentives for First-Time Buyers
Instead of broad tax cuts, the government could offer GST
rebates for first-time policyholders, encouraging uninsured citizens to enter
the safety net.
4. ITC Flexibility
If nil GST is implemented, the government could allow
insurers to continue claiming ITC on expenses. This would prevent cost
escalation.
The Bigger Picture: Insurance Penetration in India
India’s insurance penetration is still low compared to
global standards:
Life insurance penetration: ~3.2% of GDP (global average
~6.5%)
Non-life insurance penetration: ~1% of GDP (global average
~4%)
To achieve the goal of “Insurance for All by 2047,”
affordability is important, but sustainability for insurers is equally
critical. If the sector becomes financially strained due to nil GST, the larger
vision may suffer.
Expert Opinions
Industry Leaders: Insurers like HDFC Life, ICICI Lombard,
and SBI Life have expressed concerns over GST exemptions, calling them
“well-intentioned but risky.”
Economists: Experts argue that instead of blanket nil GST, a
graded tax relief model is more sustainable.
Policy Analysts: They highlight that sudden tax policy
shifts can cause uncertainty, which is bad for long-term financial planning.
FAQs on GST and Insurance
Q1. Why does the insurance industry oppose nil GST?
Because it removes input tax credit benefits, increases
operational costs, and may ultimately raise premiums.
Q2. Would customers save money under nil GST?
Only marginally in the short run. Insurers may revise
premiums upward to cover costs, reducing the benefit.
Q3. Is GST on insurance high compared to other services?
Yes, at 18%, it is relatively high. That’s why insurers
advocate for a lower rate, not complete exemption.
Q4. Could health insurance get special treatment?
Possibly. Policymakers may consider reducing GST on health
and senior citizen policies to boost affordability.
Q5. How will this impact government revenue?
It could lead to significant losses in GST collections,
affecting public spending programs.
Conclusion
The proposal to introduce nil GST on insurance products may
seem like a customer-friendly move on the surface, but it carries hidden risks.
The insurance industry fears losing input tax credit, facing higher operational
costs, and being forced to pass these costs onto policyholders.
Instead of a blanket exemption, the better approach would be
lower GST rates, targeted relief for essential policies, and incentives for
first-time buyers. This ensures affordability for citizens without weakening
the financial backbone of the insurance industry.
As India looks to strengthen its financial ecosystem and
expand insurance penetration, policymakers must carefully balance short-term
affordability with long-term sustainability. The key lies not in “no tax” but
in “smart tax reform” that benefits both insurers and customers alike.
