GST cut to help customers, impact on industry unclear

MUMBAI: Will Mediclaim and life covers get cheaper by 18% if GST is waived on health and life insurance? Not quite, say industry and researchers.

The 18% that customers currently pay helps insurers use the input tax credit (ITC) they receive on various goods and services they utilise. With zero GST tax, an inverted structure is created ,with unutilised ITC eating into insurers' margins.

Broadly, insurers have welcomed the move to make health insurance cheaper. "Lower taxation will directly make health insurance more affordable, particularly for middle-class households, rural populations and small enterprises that often perceive premiums as a financial burden," said Rakesh Jain, CEO, Reliance General Insurance. He, however, pointed to the inverted duty structure.

"This mismatch increases operational costs and creates financial inefficiencies, limiting the overall benefit of a GST reduction. Unless this anomaly is addressed, insurers may continue to face pressure on margins even as customers gain from lower premiums. For sustainable growth, tax reforms must be complemented with rationalisation of processes and policies that ease working capital management," he said.

Research houses are unclear on the impact of the GST waiver on the insurance industry. "If ITC can't be availed when GST is scrapped, insurance companies will have to hike prices by 6-10%. That will defeat the purpose of reducing GST, which is to lower eventual prices for the end consumer, spur demand, and improve penetration," said Suresh Ganapathy, a managing director with Macquarie Capital. According to Ganapathy, the revenue-neutral rate for insurance companies is around 12% - a slab the govt proposes to eliminate. The other option was to move to 5%, which GoM has decided against.


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