Insurance Tax Tussle
New Delhi
The Group of Ministers (GoM) on insurance has proposed removing GST on health and life insurance premiums, currently taxed at 18%. While this move is expected to benefit policyholders, insurers caution that a complete exemption could create challenges if input tax credit (ITC) is denied on their expenses.
Industry leaders argue that keeping a lower GST rate, ideally 5%, while retaining ITC, would be more sustainable than a nil tax. Rakesh Jain, CEO of Reliance General Insurance, noted that the industry struggles with an inverted duty structure, where insurers pay higher GST on input services like commissions and reinsurance but cannot claim credits due to exemptions. This leads to unutilised ITC, pushing up operational costs and reducing efficiency.
Jain stressed that while lower taxation makes insurance affordable for middle-class households, small businesses, and rural customers, unresolved credit blockages would squeeze insurers’ margins. Experts add that the highly regulated and capital-intensive nature of the sector already results in heavy compliance costs.
According to Mahesh Jaising of Deloitte India, exemptions risk locking working capital, unless key inputs such as reinsurance and commission payments are also exempted. Manoj Mishra of Grant Thornton Bharat LLP suggested that insurance should either be zero-rated or taxed at 5% with ITC benefits, ensuring the relief reaches both policyholders and providers.
The consensus among experts is that structural reforms, not just tax cuts, are needed to balance affordability for consumers with financial viability for insurers.
