GST Cut on Health Insurance May Lead to Premium Increases, Report Finds
Recent decisions by teh GST Council to eliminate the 18% tax on life and health insurance premiums, effective September 22, 2025, are facing scrutiny. While intended to lower costs for consumers, a new report from Kotak Institutional Equities Research suggests the move could inadvertently lead to premium increases of up to 5%.The core issue stems from the loss of input tax credit (ITC) for insurance companies. Currently, these companies claim ITC on various operational expenses including distribution commissions, reinsurance, and promotional costs. While reinsurance will now also be exempt from GST, other expenses will continue to be taxed, and the report indicates insurance companies are unlikely to be able to leverage the benefits of an inverted tax structure (ITS) due to the ’exempt’ status of individual policies.
To offset this loss of ITC and maintain profitability,the report estimates health insurance companies may need to increase tariffs on both new and existing retail policies by 3-5%. This adjustment is described as a “back-of-the-envelope calculation” to achieve margin neutrality.
Despite the potential for tariff hikes, the report highlights a positive outcome: the elimination of GST could result in an overall 12-15% reduction in health insurance costs for consumers, potentially stimulating demand. This calculation assumes the 0% GST rate is combined with the projected 3-5% tariff adjustments.
Currently, health insurance policies are subject to an 18% GST. The report details that companies currently utilize ITC on services like distribution commissions,reinsurance,and operational expenses. Tho, the report cautions that the benefit of the inverted tax structure (ITS) is unlikely to be available to insurance companies as individual policies are now ‘exempt’ and the government has not yet notified ITS benefits for the insurance sector.