Currently, premiums for health insurance policies are taxed at a GST rate of 18%, the second highest. Prior to the GST regime, the service tax rate on health and life insurance was 15%, which included a basic service tax of 14% and additional Swachh Bharat and Krishi Kalyan levies of 0.5% each. In the last three years, premium payments have generated more than ₹24,500 crore in GST revenue for the Centre, according to Finance Ministry data.
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These significant collections have come under public scrutiny, especially in the aftermath of the pandemic, as health insurance premiums have skyrocketed due to high medical inflation and rising private healthcare costs. Health inflation has consistently outpaced core inflation for much of the past decade, and the gap has widened in recent years.
In India, two-thirds of hospitals are operated by private entities, a sector with limited regulatory oversight over pricing. This situation makes the public increasingly dependent on sure to cover catastrophic health care expenses.
“The cost of seeking medical care has increased since the onset of COVID-19 as hospitals have increased their rates. This has also led to an increase in overall premiums as the burden of costs falls on the insurance company,” said Hiten Kothari, Underwriting Director and Chief Actuary, HDFC ERGO General Insurance.
Income generation vs public health
Health insurance plan premiums with a ₹10 lakh sums insured have increased by 10-18% (for a 30-year-old male resident of a metro) in the last two years, according to an analysis by insurance research platform Beshak.org, shared with MintA significant uptick was seen in the last six months in particular, said Aayush Dubey, head of research at Beshak.org.
As the government’s efforts to generate revenue increasingly clash with public health considerations, experts are questioning the logic behind maintaining the 18% GST rate.
“GST Collections “Health services have been a source of revenue for the government. But from a public health perspective, the high rate of GST on health coverage is a problematic proposition as the government has committed to achieving universal health coverage (UHC), which requires making health services more accessible,” said Soumitra Ghosh, a health economist and associate professor at the Tata Institute of Social Sciences. (India has committed to achieving the sustainable development goal of UHC for all by 2030.)
“Our public health sector remains underfunded. Therefore, any government regulation should aim to make the private health insurance market affordable, rather than making it more expensive through additional taxes,” he added.
Mampi Bose, an associate professor at Azim Premji University, pointed out that a large portion of patients’ medical expenses go towards drugs and medicines during outpatient care, which are not insured. “Therefore, paying more for purchasing policies to protect against only a particular type of risk (mainly hospitalisation) is not justified and the burden would fall heavily on the middle-income population of the country,” she said.
Medications account for about 29% of out-of-pocket spending among inpatients and 60% among outpatients in India, according to a 2022 study led by Mayanka Ambade of the International Institute for Population Sciences, published in JAMA Network.
Second-order effects?
India’s per capita spending on insurance premiumsor “insurance density”, remains one of the lowest in the world, indicating significant potential for market penetration. However, the number of people joining the insurance system has seen a marked increase in the search for financial protection against unforeseen contingencies. The share of India’s population covered by health insurance (excluding accident and travel-related health cover and life cover) rose to about 39% in 2022-23 from 17% in 2013-14, according to a Mint Data analysis from the Insurance Regulatory and Development Authority of India.
Can a higher tax rate discourage people from purchasing health coverage? While insurers have not observed significant changes in purchasing patterns, they acknowledge that it could have a chilling effect. The Standing Committee on Finance, in a recommendation in February, noted that “the high rate of GST acts as a deterrent to obtaining insurance policies.”
“People do not get any benefit from the GST they pay, unlike businesses that can claim input tax credit or other benefits, so a high GST rate can be discouraging. They may perceive it as an additional tax burden on them,” said Kothari. Ghosh adds that there is a risk that people will slowly opt for “inadequate coverage”.
The way forward: exemption or cut?
Public health experts are advocating for health insurance to be “tax-free” or subject to a zero-rated goods and services tax (GST), with the inclusion of outpatient care, to truly pass on the benefits to the population. However, with substantial revenues at stake for the government, will the GST Council blink?
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