Taxing Healthcare: The Fallout of 18% GST on Health Insurance Plans

By Ayushi Jain (with inputs from Rahul Koul)

New Delhi: The government’s recent decision to levy an 18% Goods and Services Tax (GST) on health insurance premiums is a move that warrants critical scrutiny. The decision has sparked widespread debate among policymakers, industry experts, and the public. This tax was first introduced in 2017 as part of the broader GST regime to streamline taxation and unify indirect taxes across the country.

Under the GST framework, health insurance premiums are categorized as financial services and taxed at 18%, increasing the overall cost of coverage. While this uniform structure simplifies compliance for insurers, it has led to higher premiums for consumers.

At a time when access to healthcare is more crucial than ever, this hike adds an unnecessary financial burden on individuals and families striving to safeguard their well-being. For millions of Indians, a health insurance policy is the only safeguard against catastrophic medical expenses that can easily plunge a family into debt. By imposing a higher tax on these plans, the government risks making health insurance less affordable for the very people who need it the most.

Supporters and critics: A divided view

Discussions around the 18% GST have been polarizing. Finance Minister Nirmala Sitharaman defends the tax as necessary for revenue generation, fiscal discipline, and creating a uniform tax structure. She highlighted that around 73-74% of GST revenue from health insurance is allocated to state governments, crucial for state-level development projects. Sitharaman pointed out that GST collections in July 2024 reached ₹1.82 lakh crore, a 10.3% year-on-year increase. She also suggested that the GST rate on health insurance could be reconsidered by the Rate Rationalisation Panel if concerns persist.

Proponents argue the tax will contribute to the government’s coffers, supporting public services and possibly improving healthcare infrastructure if utilized effectively. Insurance providers worry that the increased cost could reduce demand due to higher premiums, potentially affecting their revenue and profitability. The high GST rate is also seen as a deterrent to purchasing health insurance, which may further hinder India’s modest insurance penetration rates.

However, critics, including opposition leaders and industry experts, argue against the high GST rate, claiming it exacerbates the financial burden on consumers, particularly the middle class, who already face high out-of-pocket medical expenses without adequate insurance.

Union Minister Nitin Gadkari, along with several state finance ministers, has called for a reduction or withdrawal of this tax, arguing it makes health insurance less affordable. In his formal appeal to Finance Minister Nirmala Sitharaman, Gadkari emphasized that taxing life and medical insurance premiums restricts their accessibility and growth, likening it to taxing the uncertainties of life, further stating that individuals seeking protection for their families should not be burdened with additional taxes.

Shashank Avadhani, Co-founder and CEO of Alyve Health, agreed with Gadkari, stating, “Life and medical insurance products are necessities in today’s society. Waiver of GST will enable increased penetration due to lower costs and create a level playing field between out-of-pocket healthcare expenses and premiums paid as part of insurance or health plan subscriptions.”

Pankaj Nawani, CEO of CarePal Secure highlighted the significant impact of the 18% GST on policyholders, noting that it adds a considerable cost burden to the already high premiums. He emphasized that this could make health insurance less affordable for many, especially the middle class and economically weaker sections. Nawani warned, “Some insured individuals might opt to reduce the coverage amount or avoid renewing their policies altogether, potentially leaving them underinsured or uninsured.” Furthermore, he pointed out that the increase in premiums would also lead to higher out-of-pocket expenses for policyholders, such as co-payments and deductibles, affecting their financial security during medical emergencies.

Kapil Pandla, Dean of Sharda School of Business Studies, echoed these concerns, stating that the imposition of the 18% GST on health insurance premiums has significantly impacted insured patients seeking treatment at hospitals. He argued that the increased premiums, when coupled with rising medical inflation, have made health insurance unaffordable for many. “This financial strain may also compel patients to delay or forgo necessary medical interventions, which can worsen health conditions over time,” Pandla added. He also emphasized that this development hampers the Insurance Regulatory and Development Authority of India’s (IRDAI) goal of achieving “Insurance for All by 2047,” as economically vulnerable sections of the population are increasingly unable to access insurance.

According to Pankaj Nawani, insurance providers are likely to adjust their pricing strategies to account for the increased costs due to the 18% GST. “One approach could be passing the tax burden directly onto policyholders through higher premiums, which could result in reduced demand for health insurance policies, particularly voluntary health insurance products,” he said.

Nawani further elaborated that insurers may need to revisit their cost structures to absorb some of the tax burden without passing it entirely onto customers. This could involve optimizing operations, renegotiating contracts with healthcare providers, or investing in technology to reduce administrative costs.

Rollback or alternative measures?

The Rate Rationalisation Panel, reconstituted in June 2024 under the leadership of Bihar Deputy Chief Minister Samrat Chaudhary, is tasked with reviewing the issue. Members of the panel, including West Bengal Finance Minister Chandrima Bhattacharya and Karnataka Minister Krishna Byre Gowda, have requested further data before making any definitive recommendations.

Nawani emphasized that stakeholders are increasingly calling for a reconsideration of the 18% GST on health insurance premiums. He suggested that a rollback or reduction in the tax rate would alleviate the financial burden on policyholders and encourage more people to opt for health insurance, which would ultimately boost insurance penetration in the country. Nawani also proposed alternative measures such as providing tax credits or deductions to offset the GST amount or expanding government-backed health insurance schemes to bridge the affordability gap, particularly for lower-income groups.

Pandla added that the 18% GST on health insurance premiums has not gone unchallenged, with opposition leaders demanding its withdrawal. He pointed to the Standing Committee on Finance’s recommendation to rationalize the GST rate on insurance products, underscoring the need for reforms to make health insurance more accessible. Pandla also suggested potential measures such as expanding tax deduction limits under Sections 80C and 80D of the Income Tax Act, introducing GST exemptions or concessions for basic health and term insurance policies, and providing direct subsidies for economically weaker sections of society.

The GST Council is expected to address these concerns in its upcoming meeting on September 9, 2024 with the Fitment Committee’s recommendations being crucial. The committee is analyzing the potential revenue loss and other impacts of exempting health and life insurance from GST, which will influence the Council’s decision. Until then, proposals from various sectors, including hospitality, online gaming, and insurance, are under consideration for rate reductions.