The GST Council is reportedly considering a reduction in the Goods and Services Tax (GST) on health and life insurance policies from the current 18% to 5%. This middle-ground approach may offer significant advantages for both consumers and the insurance industry compared to a complete waiver.
Read More: GST relief on insurance
Understanding the Impact of GST on Insurance Premiums
Currently, insurance premiums for health and life policies are subject to an 18% GST. This adds a substantial financial burden for policyholders. However, insurers benefit from input tax credits (ITC), which help them offset their tax liabilities.
A complete GST exemption may appear beneficial at first glance, but it would result in insurers accumulating unused input tax credits. Consequently, insurers would likely increase premiums to recover the additional costs, ultimately burdening consumers.
Key Advantages of a Reduced 5% GST
- Lower Consumer Costs: A 5% GST rate would directly reduce the insurance premium cost for policyholders.
- Retention of Input Tax Credit: Insurers would still benefit from input tax credits, keeping their operational costs manageable.
- Sustainable Industry Growth: Reduced GST would enhance insurance penetration, encouraging more people to opt for life and health coverage.
Tips for Effective GST Compliance
Stay Updated: Keep abreast of the latest GST notifications and circulars issued by the government. Understanding these updates can significantly ease the compliance process.
Leverage Technology: Use CaptainBiz GST software for accounting and return filing, which can automate most of the tasks and reduce the chances of errors.
Seek Professional Help: Considering the complexity of GST laws, it may be beneficial to seek guidance from GST experts or tax consultants.
Read More: The Significant Impact of GST Software on the Financial Reporting
Comparative Analysis of GST Scenarios
| Scenario | Current GST (18%) | Reduced GST (5%) | Full GST Waiver (0%) |
|---|---|---|---|
| Premium Cost Impact | High | Moderate | Low |
| Input Tax Credit (ITC) | Available | Available | Not Available |
| Insurer Costs | Balanced | Lower | Higher |
| Consumer Benefit | Low | High | Moderate |
The Government’s Dilemma
The government collected over ₹16,000 crore from GST on insurance policies in the financial year 2023-24. Completely waiving GST would result in a significant revenue loss. Hence, a reduced GST rate is seen as a middle-ground solution that provides relief to consumers without severely impacting government revenue.
Consumer Impact Assessment
To further illustrate the financial impact on consumers, consider the following example:
| Particulars | Current (18% GST) | Reduced (5% GST) | Full Waiver (0% GST) |
|---|---|---|---|
| Base Premium (₹10,000) | ₹11,800 | ₹10,500 | ₹10,000 |
| Annual Savings | – | ₹1,300 | ₹1,800 |
This example highlights that while a full waiver offers the most savings, the loss of ITC may lead to a price surge. A 5% GST reduction offers a balanced benefit with moderate cost savings.
Conclusion
A 5% GST on health and life insurance premiums could prove more beneficial for both consumers and insurers compared to a full waiver. It ensures that insurers can retain input tax credit benefits, thereby controlling their operational costs and preventing premium hikes. Meanwhile, consumers will experience noticeable savings on their insurance premiums, enhancing affordability and encouraging wider insurance adoption.
As the GST Council deliberates on the proposal, striking a balance between consumer relief and industry stability will be key. CaptainBiz remains committed to keeping you informed on the latest tax reforms and their implications for businesses and consumers alike.
Frequently Asked Questions (FAQs)
1. Why is a 5% GST better than a full waiver for insurance premiums?
A reduced GST rate retains input tax credit benefits for insurers, preventing potential premium hikes while offering consumers a significant cost reduction.
2. Will consumers save money with a 5% GST rate on insurance?
Yes, consumers will see lower premium costs with a 5% GST rate, although the savings may be lower than a full waiver.
3. How will a full GST waiver affect insurance companies?
Without input tax credits, insurers may face increased operational costs, leading to higher insurance premiums.
4. What is the current GST rate on health and life insurance premiums?
Currently, a GST rate of 18% applies to health and life insurance premiums.
5. When is the GST Council expected to make a decision on this proposal?
The GST Council is anticipated to meet next month to deliberate on the proposal.
6. Will this GST reduction impact government revenue?
While a reduction from 18% to 5% will reduce tax revenue, it is expected to be a balanced solution compared to a full exemption.
