Why Lowering GST to 5% is a Better Option than Exemptions for Getting Affordable Health Insurance

As the government considers reforms in GST rates, prioritising affordability and sustainability will be key to fostering a robust healthcare ecosystem in India.

Why Lowering GST to 5% is a Better Option than Exemptions for Getting Affordable Health Insurance
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The proposal to lower the Goods and Services Tax (GST) on health insurance premiums from the current 18% to 5% has sparked widespread discussion. Advocates argue that such a reduction would enhance the health insurance tax benefit for policyholders and make medical coverage more affordable. Unlike a complete GST exemption, which may seem appealing on the surface, lowering GST aligns better with affordability and industry sustainability, ensuring continued access to critical healthcare services.

Why reducing GST is better than exemptions

While GST exemptions may initially appear to reduce costs, they create challenges for insurance providers. Insurers lose out on claiming Input Tax Credit (ITC), increasing their operational expenses. This added burden can lead to higher premiums for customers, countering the goal of making insurance affordable.

By reducing GST to 5%, insurers retain the ability to claim ITC. This lowers their costs, translating to more competitive premium rates for consumers. Moreover, such a reduction simplifies administrative processes, benefiting both insurers and policyholders.

Key advantages of lowering GST

1. Enhanced affordability for policyholders

A reduction in GST means immediate financial relief for individuals and families purchasing health insurance. This is particularly beneficial for those relying on medical insurance 80D to claim tax deductions. Lower premiums encourage more people to opt for health insurance, increasing overall coverage in the country.

2. Operational efficiency for insurers

Retaining ITC eligibility allows insurers to offset their input costs, enabling them to offer competitive premiums. This ensures that insurance providers can sustain their operations without compromising on service quality or coverage options.

3. Improved rural health insurance coverage

In rural areas, where health insurance penetration is already low, reducing GST can make a significant difference. Lower premiums make policies accessible to more individuals, helping bridge the urban-rural healthcare gap.

The significance of health insurance tax benefits

The health insurance tax benefit under Section 80D plays a pivotal role in encouraging individuals to invest in medical coverage. Policyholders can claim deductions on premiums paid for self, family, and parents, reducing their taxable income. With GST reduction, the tax-saving potential increases, further incentivising insurance adoption.

Currently, individuals can claim:

  • Up to Rs 25,000 for self, spouse, and dependent children.
  • An additional Rs 50,000 for parents aged 60 or above.
  • A total deduction of Rs 1,00,000 for those paying premiums for both self and senior citizen parents.

Reducing GST not only lowers premium costs but also maximises the tax-saving potential under medical insurance 80D, providing dual financial benefits.

Challenges with GST exemptions

  1. Loss of ITC benefits:
    GST exemptions prevent insurers from claiming ITC, increasing their operational costs. This eventually leads to higher premiums, negating the intended affordability.
  2. Higher financial burden on insurers:
    Without ITC, insurers must absorb additional costs, affecting their ability to expand services, especially in underserved regions.
  3. Limited impact on policyholders:
    While exemptions may reduce upfront costs slightly, the absence of ITC can offset these savings, resulting in minimal benefits for end-users.

Why 5% GST works better for everyone

  1. Maintaining a balance between affordability and sustainability:
    Reducing GST to 5% strikes the right balance, ensuring affordability for consumers while maintaining financial stability for insurers.
  2. Smoother implementation:
    Unlike exemptions, a reduced GST rate simplifies compliance processes, benefiting all stakeholders involved.
  3. Encourages wider adoption:
    Lower premiums, coupled with tax benefits under medical insurance 80D, encourage more people to opt for health insurance, improving the overall penetration rate in India.

Impact on senior citizens

Senior citizens often face higher premiums due to age-related health risks. A GST reduction can significantly lower their financial burden. Combined with Section 80D benefits, the GST reduction can make health insurance a viable option for retirees and those on fixed incomes.

Industry perspectives

Several industry experts have highlighted the importance of retaining ITC while reducing GST rates. This ensures that insurers can maintain competitive pricing without compromising on service quality. Additionally, reducing GST can help address the disparity in healthcare access between urban and rural areas, promoting equitable healthcare coverage.

How this benefits the economy

Increased health insurance adoption reduces out-of-pocket expenses for medical treatments, alleviating financial stress on households. This contributes to improved economic productivity and stability. Moreover, a healthier population places less strain on public healthcare systems, allowing for better allocation of resources.

Conclusion

Reducing GST on health insurance premiums to 5% offers a sustainable solution to making healthcare more affordable and accessible. Unlike exemptions, this approach preserves ITC benefits, ensuring that insurers can continue offering competitive premiums. For policyholders, the combination of lower premiums and enhanced health insurance tax benefit under medical insurance 80D makes this a win-win proposition.

As the government considers reforms in GST rates, prioritising affordability and sustainability will be key to fostering a robust healthcare ecosystem in India. This step could pave the way for increased health insurance penetration, safeguarding more individuals and families against financial and medical uncertainties.

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