In the upcoming Goods and Services Tax (GST) Council meeting on September 9, a significant proposal is under consideration that could have wide-reaching implications for the insurance sector and the government exchequer. The potential exemption of health insurance from GST is estimated to cause an annual revenue loss of Rs 3,500 crore, according to a government official.

“If we exempt full health insurance, the loss will be almost Rs 3,500 crore. Exemption of health insurance from GST, if approved by the Council in the meeting on September 9, will cause a huge revenue loss,” the official told Moneycontrol.

Currently, all types of health and life insurance policies attract an 18 per cent GST. The proposal to exempt health insurance from this tax is still under discussion by the Fitment Committee, which comprises state and central revenue officials. The committee's role is to review proposals related to changes in GST rates and make recommendations to the council.

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The council — chaired by Finance Minister Nirmala Sitharaman and comprising state finance ministers — will take a final call on the matter. The Fitment Committee's analysis focuses on the potential revenue implications of such an exemption. The panel’s recommendations will determine the council’s decision on the relief.

“The proposed exemption of health insurance from GST, if approved, could result in a significant annual revenue loss for the exchequer. Additionally, this exemption would render the insurance sector ineligible for input tax credits, leading to an immediate increase in the cost of servicing insurance policies. The reduction in taxes might partially offset the increased costs. However, the exact balance between these factors is difficult to determine at this stage,” Rajat Mohan, Executive Director at tax consultancy firm MOORE Singhi, told Moneycontrol.

The potential benefits of such an exemption are also under discussion. Some experts believe that making health insurance more affordable could increase its appeal among consumers.

However, the associated rise in costs due to the loss of input tax credits could act against these benefits, potentially dampening consumer enthusiasm.

“The government is walking a tightrope with discussions on exemption of health insurance from GST. On one hand, it will result in a huge revenue loss to the government, while on the other hand, exemption from GST will make insurance more affordable to the public at large and also increase market penetration,” Anchal N. Arora, Partner at Felix Advisory, told Moneycontrol.

Earlier, Union Minister for Road, Transport, and Highways Nitin Gadkari, also batted for health insurance’s exemption from GST. On June 28 — days after Sitharaman tabled the Union Budget in the Lok Sabha on July 23 — Gadkari appealed to the finance minister for the withdrawal of GST on life and medical insurance premiums. He emphasised how taxing these essential services restricts their accessibility and growth.

“The 18 per cent GST on medical insurance premium is proving to be a deterrent for the growth of this segment of business, which is socially necessary,” stated the letter.