Why the Insurance Industry Isn’t Happy About the ‘Nil’ GST Proposal

Why the Insurance Industry Isn’t Happy About the ‘Nil’ GST Proposal

 The Indian insurance sector is one of the fastest-growing financial industries, playing a crucial role in protecting lives, health, and assets. Over the last decade, the government has pushed hard to increase insurance penetration in the country through awareness campaigns, digital adoption, and tax benefits. However, a new discussion around a ‘nil’ GST proposal on insurance products has sparked concerns in the industry.

 

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.