New Delhi: When Indian parliamentarians from opposition parties demanded Finance Minister Nirmala Sitharaman to consider waiving off the Goods and Services Tax imposed on life and health insurance policies, she raised some factors associated with the taxes.

“I want to raise two important points – tax has been there on medical insurance even before the introduction of GST. There was already a pre-GST tax on medical insurance, before the GST was introduced. This is not a new issue, it was already there in all the states. Those protesting here… did they discuss regarding the removal of this tax in their states?”

The demands for junking indirect tax on health insurance came to limelight as one of her colleagues, Transport Minister Nitin Gadkari, demanded so in a letter. Sitharaman later said the letter wasn’t meant to be public.

Nonetheless, in a country that has high income inequality and healthcare infrastructure needs further major boost, Indians are debating why they should be taxed for something that is associated as a necessity – healthcare. The insurance penetration rate in India is far lower compared to many other nations and tax is an added cost that citizens need to bear if they want to buy medical insurance.

A report by the Niti Aayog said that 30 percent of the population, around 40 crore Indians, still lack any form of financial protection for health.

The Economic Survey forecasts that insurance penetration, measured as a percentage of GDP, will rise from 3.8 per cent in FY23 to 4.3 per cent by FY35. At the same time, life insurance premiums are expected to grow at an annual rate of 6.7 per cent between 2024 and 2028. This growth is driven by increasing demand for term life insurance, a younger population, and advancements in Insurtech.

Health insurance: The question of affordability

Parthanil Ghosh, Director and Chief Business Officer at HDFC ERGO General Insurance, told ET Online that although the tax structure has been simplified since the introduction of GST in 2017, the affordability factor has become an adverse issue for policyholders.

“While the single rate has ensured that the tax structure for policyholders is simplified and transparent, the affordability factor has been negatively impacted as it has made health insurance premiums costlier by the GST amount,” Ghosh explained.

Ghosh, however, highlighted a silver lining: “With Input Tax Credit available on the GST paid by the insurer, the net impact of GST is comparatively lower than that under Service Tax for some non-life insurance products.”

“Insurance companies determine the gross premiums based on the expected cost of claims and associated expenses. These premiums include the applicable GST. Thus, an insurance policy with a premium of Rs 15,000 will have an additional cost of Rs 2,700 (Rs 15,000 * 18 per cent ). The input tax credit availed by an insurance company against the services procured ensures that these costs are not passed onto the policyholders,” he said.

Insurance Samadhan’s COO and co-founder Shilpa Arora argues that the amount of GST imposed on premiums is ‘not justified.’

“GST of 18 per cent is not justified on premiums. Insurance products are bought to safeguard families against financial losses due to early death or illness. Where IRDAI is talking about insurance for all by 2047, the government should reduce the GST to make premiums more affordable,” Arora told ET Online.

Star Health didn’t respond to ET Online’s query.

Indians’ reluctance to buy insurance

Premiums on insurance often increase by 10 to 20 per cent, thus adding to the financial strain on the policy buyer. This annual surge in premiums adds to the cost burden for Indians and particularly affects senior citizens, especially ones who have retired and may be depending on savings for survival.

“In India, where around 40 crore people have no financial protection for health, it is a matter of worry, especially in the case of senior citizens, who may need a high sum insured and thus bear the significant brunt of the GST rate,” said HDFC Ergo’s Ghosh.

Shilpa Arora weighed in on this sentiment and said that if the government decides to reduce GST on insurance, it would help bring down premium prices too.

“In life insurance, if an endowment product is bought, the customer pays Rs 59,000 as a premium, but the investment will be considered as Rs 50,000 (with further mortality charges and expenses deducted), and Rs 9,000 being the GST element. This results in lower returns because the policyholder calculates the total price paid and the return he has received. He often feels cheated and loses trust in insurance products. We receive many complaints where health insurance premiums have increased significantly, and the policyholder is asking for relief. Here we cannot do much, but the government can definitely help by reducing the GST percentage,” Arora explained.

GST withdrawal on insurance: A real possibility?

Taxes are what help run a nation. Asking for a tax exemption seems to be a challenging proposition in a developing country like India. Experts believe that reduced or exempted taxes would have a positive ripple effect on citizens. But what impact would such an exemption have on insurers?

“If GST is exempted on insurance premiums, then insurance companies would not be able to avail input tax credit (ITC) on the GST paid by the insurance company, and thus, it might not truly benefit the policyholders,” Ghosh said.

Shilpa Arora, on the other hand, welcomed any future prospects of a possible exemption from taxes on life and health insurance.

“This will make premiums more affordable; people can buy better coverages. The returns of life products will improve,” she said.

Ghosh offered a different solution.

If the GST rate is set at 0 per cent or any rate lower than the current rate of 18 per cent instead of exempted, then the benefit equivalent to the ITC credit availed would still be passed on to customers, and this is expected to result in lower premiums for the customer,” Ghosh stated.

The low percentage of insurance penetration

India’s insurance penetration has increased from 3.9 percent in 2013-14 to 4 percent between 2022-23, according to Financial Services Secretary Vivek Joshi. Though the insurance industry has seen an influx of people investing in life and health insurance plans, awareness of insurance remains low in India compared to other nations.

Ghosh said that various factors contribute to the slow growth in insurance penetration.

“Affordability of health indemnity policies and financial literacy are major hurdles, as many people are unaware of the benefits of insurance in the country. With lower affordability, consumers are difficult to convince on indemnity policies. There is also a lack of customised products and lower trust in insurance policies.”

Insurance Samadhan’s Arora stated that a decrease in premiums would help encourage more investments in life and health insurance policies. She agreed that an easier tax regime would help increase the percentage of policyholders.

“Lower premiums will result in increased coverage and also reduce the lapsation of policies in later years. We strongly feel that 18 per cent is too high for an essential product for every Indian family,” Arora said.

India’s insurance penetration percentage reveals that many people don’t sign up for insurance. Experts associate this low percentage with two crucial factors: medical inflation and the absence of a healthcare regulator.

“The absence of a healthcare regulator has resulted in over 10 per cent annual medical inflation, which in turn makes health insurance premiums costlier. In fact, post-COVID, we have observed medical inflation rising steeply coupled with modern technology costs, resulting in an increase in health insurance premiums,” Ghosh elaborated.

Moreover, he said that “in order to propel insurance penetration in India, it is essential to adopt a multi-faceted approach and complement it with other factors such as a strong distribution network, innovative products and services, and a seamless claims experience to increase insurance awareness.”

Moment of truth: Insurance claim rejections

GST may be one of the problems when it comes to Indians’ reluctance to invest in insurance policies. Another significant reason for this reluctance can be linked to the increased percentage of rejected insurance claims.

A survey conducted by Local Circles showed that at least 43 per cent of insurance claims have either been partially approved or rejected in the last three years.

The survey cited the experiences of several policyholders, who revealed the challenges they faced while applying for an insurance claim.

“From insurance companies rejecting claims by classifying a health condition as a pre-existing condition to only approving a partial amount, 43 per cent of health insurance policyholders who filed a claim in the last three years struggled with getting it processed,” the report said.

“The insurance industry experiences significant fraud in the reimbursement mode, leading to high rejection rates,” countered HDFC Ergo’s Ghosh.

Shilpa Arora acknowledged that an insurance claim’s rejection does have a negative impact on policyholders.

“Insurance claim rejection does break the trust of the policyholder because the moment of trust for an insurance product is the claim. A lot is being done by IRDAI to improve the policyholder experience like the new health insurance guidelines and the revamped grievance mechanism,” Arora said.