GST 2.0: Why zero tax may not mean cheaper insurance

When the GST Council announced on Wednesday (September 3) that life and health insurance premiums would be exempt from the 18 per cent goods and services tax (GST), the move was hailed as a watershed moment. For middle-class families stretched by rising medical bills and tight household budgets, this sounded like long-awaited relief. No tax on premiums meant policies would finally become affordable, or so it seemed.

But inside the insurance industry, the mood is less celebratory. The reform may actually create a paradox: while the government scrapped GST to help consumers, many policyholders may see only modest premium cuts or, in some cases, even a slight increase.

Under the current GST regime, life insurance products are subject to GST of 4.5 per cent on first-year premiums, 2.5 per cent on renewal premiums, and 1.8 per cent on single premiums on savings products. While protection products and fund management charges on ULIPs attract a GST of 18 percent.

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SBI Special Report says GST collected from health and life insurance companies amounted to Rs 16,398 crore; with health contributing Rs 8,263 crore and life insurance Rs 8,135 crore. Additionally, Rs 2,045 crore was raised as GST from reinsurance on life (Rs 1,484 crore) and health insurance (Rs 561 crore).

Why the math doesn’t add up

Until now, insurers collected GST on premiums and simultaneously claimed what is known as an “Input Tax Credit” (ITC). ITC allowed them to recover the GST they themselves paid on expenses like distribution commissions, IT systems, office rent, advertising, and reinsurance. The system wasn’t perfect, but it let companies offset part of what they owed the government against what they had already paid to run their business.

Scrap GST altogether, and you also scrap the ITC. Those expenses, which used to be tax-adjusted, now turn into raw costs that insurers must shoulder. And given the thin margins in the business, most companies are unlikely to absorb them. Instead, some of the lost credits will find their way back into customer bills.

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Estimates suggest that instead of the full 18 per cent relief, policyholders might at best see premiums fall by 5-6 per cent. For insurers with higher operational costs, premiums could even climb by 1-4 per cent.

That’s a far cry from the headline promise.

Industry voices: optimism vs caution

Kedar Patki, CFO of IndiaFirst Life Insurance, told The Federal that the exemption will play out very differently across product categories. “Pure protection products like term insurance could see more direct benefits, since GST was applied across the bulk of the premium earlier,” he said. “But savings-linked products — endowments or ULIPs — already had GST only on the risk portion of the premium. For them, the consumer benefit is limited.”

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On the general insurance side, the mood is rosier. “This is a landmark move that will make healthcare protection more affordable and accessible for millions of Indians,” said Dr Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance. “At a time when medical inflation is rising steeply, this step directly benefits citizens and eases the financial burden on families.”

Brokerages, however, are more guarded. Kotak Institutional Equities, in its report, observed: “A back-of-the-envelope calculation suggests that health insurance companies may need to raise tariffs by 3-5 per cent; this will help the companies compensate for the loss of input tax credit that is currently availed of. At the same time, a 12-15 per cent reduction in price for the customer can potentially boost health insurance demand.”

The catch, Kotak added, lies in timing and execution. Some insurers may delay repricing, others may push through hikes faster, and multi-line insurers could smooth out the impact by cross-subsidising from other business lines.

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The contrasting views capture the tension: while consumers are told to expect savings, insurers are quietly recalculating their margins.

Kotak also flagged risks: policyholders might use the one-month “free look” window; during which they can cancel and repurchase policies, to chase lower tariffs, causing churn in the system. Kotak also pointed out that companies with higher operating ratios, such as Niva Bupa, will feel the loss of ITC more sharply than leaner rivals like Star Health.

The missing regulator

For customers, the obvious question is: why isn’t the regulator stepping in? After all, if the tax is scrapped, shouldn’t premiums fall in lockstep?

The answer lies in the structure of India’s insurance regulation. The Insurance Regulatory and Development Authority of India (IRDAI) approves products at the design stage but does not cap or control pricing in most categories. The only exception is third-party motor insurance, where tariffs are mandated and revised every year. In life and health, insurers are free to price products as they see fit, subject to disclosure norms.

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That means any savings or costs from GST reform are left to the competitive dynamics of the market. If one insurer passes on more benefits to customers, rivals may follow. But if the industry as a whole decides to claw back lost ITC, consumers may have little room to protest.

What consumers can expect

So, where does this leave the average policyholder? Industry sources say:

• Term life and some health policies are likely to become noticeably cheaper, though not by the full 18 per cent. A 5-12 per cent cut may be realistic once tariff adjustments play out.
• Savings-linked policies (like ULIPs and endowments) will see minimal change, since most of the premium was never taxed at 18 per cent in the first place.
• Health premiums could actually rise marginally at some companies, depending on their cost structures and reinsurance arrangements.

For families budgeting on the assumption of a flat 18 per cent saving, this could come as an unpleasant surprise.

The bigger debate: reform or half-measure?

Ironically, many insurers themselves had not lobbied for a complete GST exemption. Instead, sources say they would have preferred a reduced rate say 5 per cent that would still keep them eligible for input tax credits. That arrangement would have delivered some relief to customers while preserving ITC benefits for companies.

By choosing the exemption route, the government may have created a system where both sides lose something. Customers don’t get the full relief they expect, and insurers see their cost structures distorted.

A tax advisor at an insurer said, “In the long run, we need to ask if such exemptions simplify or complicate the system. A moderate rate with ITC could have been cleaner.”