The Indian government is currently reconsidering the proposal for a Goods and Services Tax (GST) exemption on certain insurance policies, particularly health and life insurance. While the Centre aims to lower the GST rates for the insurance sector, it is cautious about the potential cost implications of complete exemptions, which could inadvertently lead to higher premiums for consumers.
What Will be Economic Implications of this decision on Senior Citizens and Families?
The GoM has put forward a recommendation to lower the GST on individual health insurance policies to 5%. This move aims to make health insurance more affordable, especially for senior citizens and families. However, experts indicated that while the government is keen on providing relief to insurance holders, a complete exemption could lead to unintended consequences.
Why Full GST Exemption Could Spike Insurance Premiums
A total exemption from GST would eliminate the benefit of ITC for insurance companies. This means that insurers would not be able to offset the taxes they pay on their inputs, which could drive up the costs that they pass on to consumers in the form of higher premiums. Therefore, the government is cautious about moving forward with complete exemptions.
The Hidden Costs of GST Exemption for Insurers
The financial impact of the proposed exemptions is significant. According to estimates, exempting term life insurance from GST could result in a revenue loss of ₹200 crore annually for the exchequer. Furthermore, extending this exemption to health insurance premiums for senior citizens could cost an additional ₹3,000 crore, raising concerns about the sustainability of such measures.
Rate Rationalization
There is also focused on rate rationalization to simplify the GST structure. Currently, multiple tax rates apply to similar goods, which can lead to disputes and litigation. There is a push to streamline this into a simpler three-slab GST system, but many states are apprehensive about potential revenue losses, which has stalled any immediate decisions on the matter.
Amnesty Scheme for Customs
Our experts noted that the government is not considering an amnesty scheme for customs disputes at this time. Despite the potential benefits such a scheme could offer, especially to small businesses facing lengthy litigation, there has been little demand from industry stakeholders. The last similar scheme in 1998 failed to attract significant participation.
The Indian government is navigating complex considerations regarding GST reforms in the insurance sector. While there is a clear intent to reduce costs for consumers through lower GST rates, there are significant concerns about the implications of complete exemptions. The financial ramifications are substantial, and the government must balance its desire to support policyholders with the need to maintain fiscal health. As discussions continue, the focus remains on simplifying the GST structure and addressing long-standing customs disputes, albeit with caution about the potential outcomes.