Syllabus
GS Paper II – Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.
Context
This year, the rise in insurance premiums for health and life policies, combined with the 18% GST, has made insurance less affordable for many individuals.
GST on Health Insurance
Introduction
Insurance is a legal agreement between an insurance company (insurer) and an individual (insured). Under this agreement, the insurer promises to compensate for the insured’s losses upon the occurrence of a specified event, known as a contingency, which could include the death of the policyholder or damage to property. In return, the insured pays a premium for this coverage. India, with its rapidly growing insurance market, is the fifth largest life insurance market among emerging economies, expanding at a rate of 32-34% annually. The Insurance Regulatory and Development Authority of India (IRDAI) oversees and regulates the insurance sector in the country.
Importance of health insurance
- Health Insurance: An assurance providing immediate financial help during medical emergencies.
- Quality Health Care: Insured individuals gain access to a wide network of hospitals and healthcare providers, ensuring quality care.
- Improved Diagnosis: Health insurance plans often cover preventive services like regular check-ups and screenings, leading to early detection and treatment of diseases.
- Timely Treatment: Ensures access to timely medical care without worrying about immediate payment, resulting in better health outcomes.
- Coverage of Medical Costs: Helps cover the high costs of medical treatments, surgeries, and hospital stays, reducing the financial burden on individuals and families.
- Reduces Out-of-Pocket Expenses: A significant portion of medical expenses is covered by the insurer, minimizing the amount paid directly by the insured.
- Reduction in Poverty: By reducing out-of-pocket medical expenses, health insurance helps prevent families from falling into poverty due to medical emergencies.
Implications of GST on Insurance
- Pre-GST Taxes: Life insurance premiums were subject to a 15% service tax, which included Basic Service Tax, Swachh Bharat cess, and Krishi Kalyan cess.
- Increase in Tax Rate: With the introduction of GST in 2017, the tax rate increased from 15% to 18%.
- Current GST Rate: The current GST rate on health and life insurance policies is 18%.
- Impact of GST: The inclusion of service tax under GST has led to increased premiums for insurance policies.
Arguments in Support of GST on Insurance
- Rationale for GST Imposition: Recommended by the GST Council, a constitutional body.
- Revenue Generation: GST on insurance generated Rs 21,256 crore in the last three financial years and Rs 3,274 crore from the reissuance of health policies.
- Medical and Retail Inflation: The rise in inflation, especially medical inflation, justifies the need for GST to cover increased costs.
- Tax Deductions: Insurance premiums are eligible for deductions under Sections 80C and 80D of the Income Tax Act, 1961, including the GST component.
- Simplification and Transparency: GST replaces multiple indirect taxes, simplifying the tax structure and bringing more transparency.
Arguments Against GST on Insurance
- High GST Rate: The 18% GST rate on insurance premiums is among the highest in the world, increasing costs for policyholders.
- Impact on Insurance Penetration: High GST rates lead to high premiums, which can deter people from purchasing insurance policies, thus impacting insurance penetration.
- Effect on Policy Renewal Rates: High medical inflation and frequent premium hikes have led to declining policy renewal rates, especially affecting senior citizens and low-income groups.
- Accessibility Despite Tax Deductions: The high GST rate still imposes a significant burden despite tax deductions, making insurance less accessible.
- Global Comparisons: Other markets like Singapore and Hong Kong have no GST or VAT on insurance, making it easier to sell insurance without additional tax burdens.
- Initial Complexity: Initial confusion and complexity in understanding the new tax regime can burden insurance companies and policyholders.
Way forward
- Reduce GST on Essential Insurance Products: The government could consider reducing GST rates on essential insurance products like health and life insurance.
- Keep Uniform GST Rates: Establishing a more uniform GST rate across different types of insurance products could simplify the tax structure and reduce administrative burdens.
- Streamline Input Tax Credit (ITC) Claims: Simplifying the process for claiming input tax credits for insurance companies can help reduce the overall tax burden.
- Cross-Sector Coordination: Facilitate better coordination between the insurance sector and other sectors to streamline ITC claims and minimize disputes.
- Policyholder Education: Launch awareness campaigns to educate policyholders about the importance of insurance and the impact of GST on premiums, which could help maintain and potentially increase insurance penetration.
- Regulatory Collaboration: Encourage collaboration between the GST Council, insurance regulatory bodies, and industry stakeholders to address sector-specific issues and streamline GST processes.
- Adopt Advanced IT Solutions: Leverage technology to simplify GST compliance, such as automated GST filing systems and real-time tax reconciliation tools.
Conclusion
Balancing the need for revenue generation with the affordability of insurance is crucial. By implementing these recommendations, the government can make insurance more accessible while maintaining a streamlined and transparent tax system. This approach can help achieve broader insurance coverage and financial protection for all citizens.
Related PYQ
In order to enhance the prospects of social development, sound and adequate health care policies are needed in the fields of geriatric and maternal health care. Discuss. [UPSC CSE – 2020 Mains]
Practice Question
Discuss the implications of the Goods and Services Tax (GST) on health insurance in India. Analyze both the positive and negative impacts, and suggest measures to make health insurance more affordable while maintaining revenue generation. (250 words)