Insurance companies still have access to unclaimed input tax credit, according to Finance Minister Sitharaman, who defends the nil GST.
The Indian government's decision to lower the Goods and Services Tax (GST) rates on life and health insurance has been defended by Finance Minister Nirmala Sitharaman. This move, effective from 22nd September, was a response to public demand, according to the Minister.
However, the exact impact of this GST rate reduction on the insurance sector is yet to be determined. The GST Council's decision means that insurance companies will no longer be able to offset the tax paid on those expenses, which could potentially lead to an increase in health insurance premiums.
According to a report by Kotak Institutional Equities Research, standalone health insurers like Star Health and Niva Bupa may require a price hike of 1-4% to offset the loss of Input Tax Credit (ITC) due to the GST exemption. Similarly, insurance companies such as ICICI Prudential Life, HDFC Life, and SBI Life, among others, might need to revise their tariffs by up to 5% to compensate for the loss of ITC.
Insurance companies claim ITC on operational expenses such as rent, distribution commissions, IT-related services, and administrative expenses. Multi-line insurers may still have some relief as they have other portfolios on which they can avail ITC.
Despite a possible price hike, policyholders may still benefit from a 12-15% reduction in prices, which could support demand for the sector. This reduction in prices is a result of the government's decision to lower the GST rates, which was aimed at making insurance more affordable for the public.
FM Nirmala Sitharaman stated that there are still many insurance portfolios on which insurance companies can avail ITC. She also defended the government's decision, emphasising that it was a step towards making life and health insurance more accessible and affordable for the common man.
The GST Council, chaired by FM Nirmala Sitharaman, reduced the GST rate on life and health insurance to zero. This decision was significant, considering that Star Health, for instance, paid over Rs 3,000 crore in GST in the fiscal year 2025 and availed ITC of Rs 395 crore.
In conclusion, while the GST rate reduction on life and health insurance is a positive step towards making these essential services more affordable, it may adversely affect standalone health insurers and potentially lead to an increase in premiums. However, the exact impact on the insurance sector is yet to be fully understood and will likely unfold in the coming months.
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