GST on insurance: Will the fitment committee change its mind?

Amidst the raging debate and protests against GST on insurance, especially health insurance, the Fitment Committee of the GST Council is likely to take up representations on the issue once again.

The Committee has previously rejected revision in rate on three occasions on the grounds that standard rate during pre GST regime and reduction or exemption could lead to distortion of tax structure.

• Also read: GST on insurance premium: Council likely to meet on Sept 8 and 9

The Committee

The Fitment Committee examines representations regarding revision of rates on goods and services, does the ground work and finally gives suggestions to the GST Council. Accordingly, the GST Council discusses each individual issue and gives the final recommendations which are then implemented by the Centre, States and the Union Territories. The Committee comprises officers from Central GST, State GST and GST Council. While the Committee is expected to meet next week, the GST Council is scheduled to meet on September 9.

According to the agenda note for 31^st GST Council meeting (December 22, 2018), a proposal for reduction in rate of tax from 18 per cent on service of insurance was brought before the Committee. Another proposal was pertaining to lowering GST to 5 per cent from 18 per cent on health insurance. However, the Committee did not agree to any of these two proposals.

Compliance burden

In the discussion on the first proposal, the Committee noted: “Exemption would lead to ITC reversals and shall increase the compliance burden on part of the insurance company. Exemption of output services will lead to blockage of ITC and shall increase the cost of output services to the consumer.”

• Also read: States get nearly 3/4th of GST on health insurance, says Sitharaman

The issue of GST on insurance again popped up before the 37^th meeting of GST Council, when a comprehensive proposal came up. With references from Financial Services Department and IRDA, the proposal was brought before the GST Council. This included lowering GST to 5 per cent from 18 per cent on health insurance, term life insurance, motor third party insurance premium and exemption from GST on purchase of annuity from accumulated pension amount.

Huge revenue loss

The Committee recommended that these might not be accepted to reduce GST on insurance service from the existing rates now. Further, it said that GST collection from financial and other related services such as insurance, pension etc is over ₹1.24 lakh crore (₹72,012 cr in cash and ₹52,150 cr in credit). Service tax of 15 per cent was levied on insurance sector in the pre-GST era. Therefore, any reduction of GST to 5 per cent from 18 per cent would lead to huge revenue loss to the government. However, the proposals may be revisited once the revenue position improves, it said.

Agenda note for 47th^th GST Council (June 28-29, 2022) mentioned one more proposal before the Fitment Committee regarding removal of GST on life and health insurance. After consideration, the Committee said: “This is a new exemption request. Exemption/lowering GST rate will lead to cascading of input taxes and result in distortion of tax structure. No change recommended.”

For the same meeting, the Committee considered another proposal on exempting GST on premium payable on group insurance policy for senior citizens and reducing GST on health insurance premium for senior citizens. Then, the committee said that request was for new exemption. ”The same was taxable in service tax regime too. Further, the request has already been rejected in 31st and 37th GST Council Meeting. Exemption/lowering GST rate will lead to cascading of input taxes and result in distortion of tax structure,” it said while adding that the request need not be accepted.