Why 18% tax on health insurance?

After the Union Budget 2024-25 was presented, a debate over the appropriateness of 18 per cent GST on life and health insurance policies cropped up.

According to Nitin Gadkari, the Union Minister of Road Transport and Highways, the 18 per cent GST on life and medical insurance premium amounted to “levying tax on the uncertainties of life”, besides it “proving to be a deterrent for the growth of this segment of business, which is socially necessary.”

Early this year, the Parliamentary Standing Committee on Finance led by Jayant Sinha, MP, had recommended GST on health insurance, particularly for senior citizens, be lowered. In fact, during the pandemic, the then chairman of the Insurance Regulatory and Development Authority of India (IRDAI) had requested the Finance Ministry to cut GST rate on life and health insurance.

The GST Council has set up a 13-member Group of Ministers to decide on the issue with a mandate to submit its report to the Council by October-end.

This piece argues in favour of reducing substantially or abolishing GST on health insurance.

In India, individual health insurance, which started taking roots in 1980s, is today a fully grown service complementing the governments’ endeavours to provide “insurance for all by 2047.”

Before GST was implemented in 2017, a 15 per cent service tax used to be loaded on health insurance premiums. However, the transition to a higher tax rate wasn’t resisted by anyone until the Covid-19 havoc compelled the people to take their health issues rather seriously, and they hunted for health cover.

As a result of the pandemic-induced losses suffered by health insurers, they had already raised their premiums. The inflated premiums along with 18 per cent GST was a big burden for people. So it was the pandemic that brought to fore the issue of high health cover premiums.

GST collected from health insurance premium is equally shared between the Centre and States.

The Central and State governments provide universal health cover for all, but such facilities suffer from several handicaps, and are mainly availed of by the “bottom of the pyramid” for whom, additionally, the governments have targeted programmes. While the ‘top of the pyramid’ can afford even high-value policies, the middle class is the suffering lot which includes the various working classes and most importantly, senior citizens. While some of them get employer-sponsored medical facilities in some form or the other, a significant chunk is left to fend for itself.

The ACKO India Health Insurance Index 2024 reveals a 14 per cent annual rise in healthcare costs, with 62 per cent out-of-pocket expenses.

GDPI and GST

During 2017-18 to 2023-24, the Gross Direct Premium Income (GDPI) as well as GST from health policies posted compound annual growth rates of 19.27 per cent each (Chart 1). 2020-21 marked an inflection point for both GDPI and GST [chart 1 (our computation @18 per cent of GDPI)]. Out of the total GDPI and GST collected during 2017-18 to 2023-24, over seven-tenth of each accrued during 2020-21 to 2023-24.

During 2017-18 to 2023-24, health insurance penetration (GDPI/Gross Domestic Product) as well as health insurance density (GDPI per capita) increased serially and rapidly: the former from 0.22 per cent to 0.37 per cent and the latter from ₹276 to ₹751 (Chart 2).

GST on health insurance policies contributed 2.05 per cent to total GST in 2023-24, from 1.54 per cent in 2017-18.

Call for GST cut

(i) Health insurance is primarily a welfare-oriented product and considering the perennially increasing healthcare costs, any reduction in GST will ameliorate financial hardship, especially for the middle class households and senior citizens.

(ii) Higher coverage of health insurance from the middle class will boost general insurance penetration and density.

(iii) Under Section 80D of the Income Tax Act, one can get tax deduction of up to ₹25,000 each year for health insurance premiums. For senior citizens, this is ₹50,000. In many cases, people shirk to buy higher value policies, as the premium plus GST exceeds the above-mentioned tax-deductibility threshold/s. Thus, such cases remain under-insured.

(iv) These days, instances of people seeking hospitalisation due to exogenous factors have become rather common, GST on health insurance acts as yet another tax.

(v) Looking at the services that fall under 18 per cent GST rate slab, it appears that health insurance is a ‘non-essential’ service. This impression needs to be rectified.

(vi) Health insurance is a core part of the entire organised healthcare ecosystem. The reduction in GST by increasing the demand can help expand the ecosystem to achieve a critical scale in the economy.

(vii) Even if GST is reduced, the revenue therefrom will be supported by the growth in health premiums, which, according to the Economic Survey (2023-24), “are projected to grow by 9.7 per cent annually in 2024-28, with regulatory initiatives to improve the attractiveness of insurance offering some support.”

(viii) At present health insurance segment provides the highest GDPI in the non-life sector and simultaneously experiences the highest outgo. Hence, any reduction/abolition of GST for retail health policies may attract more policyholders, but potentially increase the outgo too.

(ix) Recently, the Pradhan Mantri Jan Arogya Yojana (PM-JAY) has been extended to senior citizens aged 70 and above regardless of income with coverage of ₹5 lakh per family. Now the major question is whether ₹5 lakh would be enough for the entire family including seniors? Nevertheless, this extended coverage shouldn’t be used as an argument against reduction/abolition of GST on health insurance.

(x) Finally, the cross-subsidisation, through GST, between the government-sponsored schemes and the regular health insurance policies should be kept at the minimum.

No doubt, reduction/abolition of GST on health insurance will reduce revenues for governments for which they have to reshuffle the rates and items. Further, any reduction in GST rates on health insurance should be matched by concrete steps by IRDAI to have caps on annual increases in the rates by insurers that burden the policyholders, especially the middle class and senior citizens.

All computations are based on data collected from IRDAI, GIC Council, RBI and Budget publications, unless otherwise mentioned.

Srinivasan is a former wholetime member, IRDAI. Das is a former senior economist, SBI. Rath is a former central banker. Views are personal.