09-August-2024-Editorial

GST ON HEALTH AND LIFE INSURANCE: CURRENT DEBATES AND IMPLICATIONS

The Goods and Services Tax (GST) on health and life insurance premiums has become a focal point of debate in India, particularly after opposition leaders led protests demanding the removal of the 18% GST on insurance premiums.

This tax, coupled with the rising cost of premiums, has made insurance unaffordable for many, prompting extensive discussions among policymakers, industry experts, and citizens.

Current State of Health Expenditure in India

High Medical Inflation:

• India’s healthcare system is grappling with high medical inflation, estimated to be around 14% by the end of 2023.
• This inflation is driving up healthcare costs, further burdening individuals and families.

Out-of-Pocket Expenditure (OOPE):

• Despite a reduction from 62.6% in 2014-15, Out-of-Pocket Expenditure (OOPE) still accounted for 39.4% of Total Health Expenditure (THE) in 2021-22, according to National Health Accounts (NHA) data.
• In states like Uttar Pradesh, OOPE is alarmingly high, reaching 71.3%.

Marginal Increase in Government Health Expenditure (GHE):

• The share of Government Health Expenditure (GHE) in THE has risen marginally from 28.6% in 2013-14 to 40.6% by FY19.
• GHE as a percentage of GDP increased by 63% between 2014-15 and 2021-22, from 1.13% to 1.84%.

Share of Health Expenditure in GDP:

• In 2019-20, India’s Total Health Expenditure (THE) was Rs. 6,55,822 crores, representing 3.27% of GDP, or Rs. 4,863 per capita.
• In contrast, countries like the US allocate around 18% of their GDP to healthcare, while Germany and France spend about 11-12%.

Need to Reduce GST on Health and Life Insurance Premiums

Insurance as a Basic Necessity:

• Insurance is crucial for financial protection against unforeseen events, safeguarding family finances. Hence, it should not be subjected to high taxation.

Affordability Concerns:

• The 18% GST on insurance premiums significantly inflates costs, making it difficult for individuals to afford or maintain their policies.
• With health insurance premiums having surged by up to 50% in some cases, many find themselves unable to continue their coverage.

Global Comparisons:

• India’s GST on insurance is among the highest globally. Countries like Singapore and Hong Kong do not impose such taxes, making their insurance products more affordable and appealing.

Impact on Insurance Penetration:

• The high GST rate contributes to low insurance penetration in India, which was just 4% in 2022-23, below the global average of 7%.
• Reducing GST could boost insurance uptake, supporting the vision of “Insurance for All by 2047.”

Economic Growth:

• Taxing insurance premiums may stifle the growth of the insurance sector, which is critical for economic stability and individual financial security.

Potential Downsides of Removing GST on Insurance Premiums

Revenue Loss for Governments:

• GST from life and health insurance (@ 18%) generates substantial revenue for federal and state governments. Removing it could lead to budget deficits, affecting public health funding.

Increased Burden on Other Taxpayers:

• To offset the lost revenue, governments might need to raise other taxes, thereby placing additional pressure on taxpayers.

Potential for Price Increases:

• While removing GST might lower costs for consumers, healthcare providers could hike prices to maintain revenue, negating the intended benefits.

India’s Insurance and Pension Sector

Global Comparison and Growth Potential:

• India’s insurance and pension sectors are underdeveloped compared to global standards.
• While they contribute 19% and 5% to India’s GDP, respectively, countries like the US and UK have much higher penetration rates, highlighting significant growth opportunities in India.

Industry Performance:

• The General Insurance sector collected Rs 1,09,000 crore in health premiums in FY 2023-24.
• The Life Insurance industry garnered Rs 3,77,960 crore in premiums in FY 2024, with LIC leading at Rs 2,22,522 crore.

Way Forward

GST Review:

• The government should consider lowering the GST on health and life insurance premiums to enhance affordability and increase penetration.
• A parliamentary committee, led by a former Minister of State for Finance, has recommended reducing GST on health and term insurance to lower premiums.

Capital Support to Insurance Sector:

• A parliamentary committee has suggested that the Reserve Bank of India issue “on-tap” bonds to meet the capital needs of the insurance sector, estimated at Rs 40-50,000 crore.

Increased Public Investments in Healthcare:

• More public investments in healthcare can make services more affordable, meeting latent demand, and improving access to care.

Investments in Medical Colleges:

• Expanding investments in medical colleges can reduce healthcare costs and enhance the quality of health services across India.

Policy Reforms:

• Reforms to curb medical inflation and control healthcare costs can make health insurance more affordable. Offering incentives to insurers can also foster competition and innovation, further reducing costs.