Taxing times: How GST on health insurance premiums is biting into your savings

Think of health insurance as a financial asset. It’s like a safety net, protecting you and your loved ones from unexpected medical expenses. But what if the hidden taxes are inflating the cost of that safety net?

That’s the case with the GST (Goods and Services Tax) on health insurance premiums. It’s a tax that’s been quietly adding to the cost of your health insurance, making it more expensive than it should be, thus hurting your ability to get good healthcare.

Current State of GST on Insurance

Before we start explaining the tax conundrum on health insurance premiums, here’s a basic understanding of GST rates on different types of policies:

Even before the implementation of the Goods and Services Tax (GST) in July 2017, health insurance premiums were primarily subject to Service Tax and other various rates such as Swachh Bharat Tax, Basic Service Tax, and Krishi Kalyan Cess.

This GST currently makes insurance premiums too costly for most people who can’t afford it. It also detracts people from buying insurance purely to save on taxes under the following tax saving allowance designed for insurance, because an upfront 18% GST for the following maximum deductions is not very appealing. 

GST on insurance: Why are we talking about it now?

At the time of implementing the GST in 2017, the then Finance Minister, Late Arun Jaitley, had said, “Thrust of the government is to lower the tax rate and increase the tax base and keep the revenue collections moving up.”

It has been over seven years since tax rates of insurance premiums came under GST, and the hike in premiums has been detrimental to the overall growth of the insurance industry.

This has led to growing discontent among consumers who are feeling the financial pinch. Of late, the Opposition parties have also been calling for a change. They argue that the GST on health insurance is a burden on the middle class and should be reduced or eliminated.

The GST Council is finally taking action. 

The Finance Minister of India Nirmala Sitharaman and her team have decided to form a committee (GoM) to study the taxation issue and make recommendations. The outcome of this committee’s investigation, expected in November’s GST Council meeting, could see a significant impact on the cost of health insurance in India.

If the GST is reduced or eliminated, it could make health insurance more affordable for everyone. This, in turn, could encourage more people to buy health insurance, leading to a healthier population overall. 
Also, from the business point of view, lower GST rates could mean more business. Read on to know more.

How will consumers be impacted if GST is waived off or lowered? 

It could be a game-changer for consumers. Here’s how:

Lower Costs: Reduced GST would mean lower premiums, making health insurance more affordable for everyone.

Increased Access: More people could afford health insurance, which would lead to better health outcomes overall.

Enhanced Competition: With increased demand, insurers would have to compete for your business by offering lower premiums and better coverage.

Real Tax Savings: You would actually get a true sense of your income tax savings instead of paying it back to the government as GST. This means that if tax is lowered or removed from the insurance premiums, the amount of tax deduction benefits you receive will be a true refund.

To summarise, it’s a win-win situation. Lower GST on health insurance premiums could benefit both consumers and the economy as a whole. 

How will it impact the government?

In the short-term perspective, the lowering or exemption of GST on insurance premiums will directly hit the government’s revenue from GST collections. Since the revenue helps in containing the fiscal deficit target of the Government, a cut may also widen the fiscal deficit making it challenging for the government to meet its expenditure.

But, there are certain advantages in the long term.

In the longterm, lower GST rates could boost economic growth by increasing consumption as more working-class citizens would be able to afford insurance policies. 

It could reduce complexity and lead to less compliance burden on insurance companies as more insurance products would be taxed at a single, lower rate. 

Moreover, the stimulus effect of lower or no GST rates could lead to an increase in GDP as more people will be able to afford insurance policies, thereby adding to the country’s economic growth.

It’s a risky move, but the potential rewards could be significant. The government will need to weigh the short-term costs against the long-term benefits before making a decision.

How will lowering GST rates impact the insurance industry?

Lower taxes mean more business. If the government reduces or eliminates the GST on health insurance premiums, it could be a major win for the insurance industry.

Why?

Market Growth: Lower premiums would make health insurance more attractive, expanding the customer base and boosting the overall market for insurance.

Reduced Marketing Costs: With more people interested in buying health insurance, insurance companies could spend less on marketing and still achieve their sales goals.

It’s a win-win. A lower GST could benefit both consumers and the insurance industry. It’s a move that could lead to a healthier population and a stronger economy.

Why should you as an investor care about the impact of GST on insurance companies?

If tax on something as important as health insurance premiums is reduced or removed, it could boost demand for insurance policies. This could lead to better profits for insurance companies, which could benefit investors.

Simply put, if GST is waived off or becomes significantly lower, it should positively impact the growth of listed insurance companies, making it a good investment bet. 

However, as an investor, you should never let go of the basics and always do the following before investing:

Monitor the Market: Keep an eye on how insurance companies are performing after any changes to the GST.

Consider Valuation: Look at the valuation of insurance stocks to see if they’re a good investment.

Analyse Earnings Forecasts: Pay attention to how analysts are predicting the future earnings of insurance companies.

Gauge Market Sentiment: Understand how other investors feel about the insurance industry and its prospects.

Do your research: Conduct your own in-depth research of the stock fundamentals before making your decision.

By carefully considering these factors, you can make informed decisions about investing in insurance stocks.

If you are interested to know more about insurance stocks and their returns, you can check out some smallcases.