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New Delhi: The Goods and Services Tax (GST) Council is likely to discuss the removal of GST on premiums paid for term life insurance policies in its upcoming meeting, two experts said. ET Wealth OnlineThe demand to remove the 18 percent tax has been long standing from various stakeholders of the insurance industry. Insurance customers also want the government to remove GST as the additional tax increases their financial burden. Debate on 18 percent GST imposed on life and health insurance premium The issue came into the limelight last month after various political leaders, including Union Road Transport and Highways Minister Nitin Gadkari, urged Finance Minister Nirmala Sitharaman to roll back the tax. Will the central government finally remove the 18 per cent GST and reduce your life and health insurance premium? Read on to know what experts are saying. GST Council Will 18% GST on term insurance premium be removed?
Harsh Bhuta, Partner, Bhuta Shah & Co LLP, says, “The GST Council is likely to consider important issues related to rationalisation of rates, tax on TDR, inverted duty structure, etc. in its upcoming meeting on September 9, 2024. One such issue that may find support in the meeting is the removal of GST on premiums paid for term life insurance.”
Why is GST Council likely to remove 18 per cent GST on term insurance premium?
Term insurance policies are the most popular type of life insurance, which offers only death benefits without any maturity benefits. These are purely risk products designed to provide adequate coverage at a relatively low cost. Adding GST to the term insurance premium ultimately makes the premium payout higher. Moreover, insurance policyholders get benefits or their money back only in case of unforeseen events like death. Otherwise, they may not even benefit from buying a term insurance plan. Shah says, “The idea behind such policies is to provide financial support to the family of the deceased against income disruption due to the sudden death of a family member. Therefore, taxing such instruments that are purely protective and not income-generating is not in line with the intent of the GST law to include them in the scope of supply.”
“Therefore, the Council may consider that premiums paid for life protection or protection against uncertainties of life should be exempted rather than investments made for future benefits,” says Bhuta.
Narendra Bharindwal, vice-president, Insurance Brokers Association of India (IBAI), says, “The primary purpose of a term plan is to provide financial security to beneficiaries after the death of the policyholder. Given its role in mitigating financial challenges for families during their most vulnerable moments, reducing or eliminating GST on term insurance could substantially enhance its appeal to potential policyholders. This focus on term insurance stems from its potential to increase insurance penetration, providing crucial financial support to families in times of need.”
Will the GST Council remove 18% GST on other life insurance products as well?
On the removal of GST on premiums of other life insurance policies like Unit Linked Insurance Plans (ULIPs) or investment linked plans, Shah says that those policies will continue to be taxed. One of the main reasons for this is that those plans provide life protection cover as well as returns on your investment. It is unlikely that the GST Council will consider removing GST on investment linked products.
Sandeep Pareekh, partner, indirect tax department, BDO India, says, “It is likely that the GST Council will consider this demand of the industry positively, especially if the revenue loss due to such exemption is not large. However, to pass on the full benefit of the GST exemption to the general public, insurance companies will also need to be allowed full input tax credit, without having to carry back the credit due to the GST exemption on term insurance.”
Gadkari had earlier urged the Finance Minister to withdraw GST on life and health insurance premium
Earlier in a letter dated July 28, 2024, Gadkari had addressed the concerns mentioned in the memorandum submitted by the Nagpur Division Life Insurance Corporation Employees Union regarding matters affecting the insurance industry. Citing their memorandum, the minister said that “imposition of tax” GST on Life Insurance Paying premium is tantamount to taxing the uncertainties of life. The association believes that a person who covers the risk of uncertainties of life to give security to the family should not be taxed on the premium paid for buying cover against this risk.”
“Similarly, 18 per cent GST on medical insurance premium is proving to be a hindrance to the growth of this business segment, which is socially essential,” he wrote.
Finance Minister will talk to GST Council on the issue of removal of 18 percent GST on insurance premium
On the removal of 18 per cent GST on life and health insurance premium on August 7, 2024, Sitharaman said, “Many suggestions have come and I will take up the issue with the GST Council.”
GST on Health Insurance Premiums should also be removed or reduced: Industry
The insurance industry is actively seeking the removal of this tax, arguing that it significantly increases the cost of insurance coverage for policyholders. Tapan Singhal, MD & CEO, Bajaj Allianz General Insurance, says, “We have been saying for some time that it is important to reduce GST rates on health insurance premiums given the low penetration of insurance in India and the essential financial support that insurance provides against sudden financial losses. Reducing GST on health insurance from 18 per cent to 5 per cent will make it more affordable, encouraging more people to buy it. Insurance is not a luxury item; it is a necessity that everyone must afford. Heavy taxation makes it difficult for people to be financially secure. We need to look at insurance as a basic necessity, just like developed countries make health insurance compulsory for employers, but at affordable rates offered by many state governments. High taxes create a barrier to entry, leaving a large section of the population exposed to financial vulnerability. By creating a more favourable environment through lower GST, we can empower more people to choose insurance protection, leading to financial security, ultimately benefiting the entire economy. Hope to see this initiative from the government soon.”
Bharindwal says, “Insurance serves as an important risk mitigation tool, providing financial support to individuals and entities when insured risks occur, thereby reducing the burden on the government to provide financial support. While affordability is a shared responsibility between the government and insurers, tax cuts or rebates on insurance products can play a key role in making these products more accessible. However, such tax relief should be strategically targeted at personal insurance lines, as commercial lines already benefit from input tax credits. By focusing on personal insurance, the government can help ensure that essential protection is within the reach of a wider population.”
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