GST Exemption Debate on Group Health Insurance Policies

The Kerala High Court recently passed an interim stay order exempting Goods and Services Tax (GST) on premiums paid for group health policies by retired bank employees. This move brought into light issue overlooked in the GST exemption granted earlier on individual and family floater health policies. While individual policies enjoy an 18 per cent GST waiver, group health insurance policies remain taxable. This distinction affects millions of policyholders, especially retired employees and association members, sparking debate on fairness and policy reform.

GST Exemption on Health Insurance

The GST Council exempted individual and family floater health insurance policies from the 18 per cent tax to encourage health coverage. However, group health policies, which cover a large segment of the insured population, were excluded. The Central Board of Indirect Taxes and Customs (CBIC) clarified that exemption applies only to policies taken individually. Group policies, even if covering individuals, attract GST because they are collective contracts between an insurer and an organisation or association.

Impact on Retired Bank Employees and Others

Around two lakh retired bank employees using group health insurance through associations remain liable for GST. Many flagged this after the exemption announcement. The interim stay order by Kerala High Court offers temporary relief but the final outcome depends on ongoing hearings. This issue extends beyond retired bankers, affecting self-employed persons, employees covering parents through employer group policies, and others relying on group insurance.

Significance of Group Health Insurance

Group health insurance covers approximately 25.5 crore people in India as per FY24 data from the Insurance Regulatory and Development Authority of India (IRDAI). This accounts for 82 per cent of all health policies excluding government schemes. The gross premium on group policies was ₹55,666 crore in FY24, constituting 57 per cent of total premiums. Waiving GST on these policies would imply a revenue loss of about ₹10,000 crore in addition to the ₹7,500 crore foregone on individual policies, totalling under ₹15,000 crore.

Rationale Behind GST on Group Policies

The GST Council argues group policies differ from individual contracts. They offer lower premiums, no waiting periods for pre-existing conditions, and no mandatory medical examinations. These commercial contracts are between insurers and companies or associations. It is claimed companies can claim input tax credit (ITC) on GST paid, reducing their tax burden. However, ITC is limited to sectors with mandated group insurance or where the supply category matches input services, which excludes many group policyholders.

Variations in Group Health Insurance Models

Group health insurance has diverse premium payment models: 1. Employer fully pays the premium as employee welfare. 2. Employer pays for basic cover; employees pay for additional coverage. 3. Employer negotiates discounted premiums; employees pay entire premium via payroll. 4. Associations negotiate for retired or self-employed individuals who pay premiums themselves. Most models involve individuals bearing some or all premium costs. The fourth model includes vulnerable groups like senior citizens and non-salaried persons who face GST on premiums without employer support.

Policy Implications and Equity Considerations

Applying GST on group health insurance premiums disproportionately affects those paying from personal funds. Exempting group policies could increase insurance penetration and improve health security. Given the limited revenue loss and the large population covered, a uniform GST waiver on all health insurance premiums would promote fairness and encourage wider coverage.

Questions for UPSC:

1. Critically analyse the impact of Goods and Services Tax on health insurance penetration in India with suitable examples.
2. Explain the role of group insurance schemes in enhancing social security and discuss the challenges they face in the Indian context.
3. What are the benefits and limitations of input tax credit under GST? How does it affect different sectors including insurance?
4. Comment on the significance of judicial interventions in tax policy reforms in India and their impact on vulnerable groups.

Answer Hints:

1. Critically analyse the impact of Goods and Services Tax on health insurance penetration in India with suitable examples.

1. GST exemption on individual and family floater health policies encourages more people to buy health insurance.
2. Group health insurance policies, covering 82% of insured persons, remain taxable, limiting affordability and penetration.
3. GST at 18% increases premium cost, especially hurting retired employees and self-employed relying on group policies.
4. Kerala High Court’s interim stay on GST for retired bank employees’ group policies marks demand for broader exemption.
5. Revenue foregone by exempting group policies (~₹10,000 crore) is manageable compared to health security benefits.
6. Unequal GST treatment between individual and group policies creates disincentives for collective coverage expansion.

2. Explain the role of group insurance schemes in enhancing social security and discuss the challenges they face in the Indian context.

1. Group insurance covers large populations (25.5 crore in FY24), providing affordable health security to employees, retirees, and associations.
2. Offers benefits like no waiting period, lower premiums, and simplified medical requirements, enhancing access.
3. Models vary – employer-paid, shared cost, payroll deduction, or association-negotiated plans for vulnerable groups.
4. Challenges include GST taxation on premiums paid personally, reducing affordability for retirees and self-employed.
5. Limited input tax credit availability restricts cost recovery for many groups and sectors.
6. Policy gaps and tax inequities hinder wider adoption and social security enhancement through group schemes.

3. What are the benefits and limitations of input tax credit under GST? How does it affect different sectors including insurance?

1. Input Tax Credit (ITC) allows businesses to reduce GST liability by claiming credit on taxes paid on inputs/services.
2. ITC promotes tax neutrality, avoiding cascading taxes and reducing overall tax burden in compliant sectors.
3. In insurance, ITC on premiums is allowed only if group insurance is mandated by law or supply category matches input service.
4. Most group health insurance policies do not qualify, limiting ITC benefits for employers and associations.
5. Absence of ITC makes GST on group insurance premiums a real cost, discouraging uptake in sectors without mandated coverage.
6. Thus, ITC’s scope and restrictions cause uneven tax impact across sectors and insurance models.

4. Comment on the significance of judicial interventions in tax policy reforms in India and their impact on vulnerable groups.

1. Judicial interventions, like Kerala High Court’s stay on GST for retired bank employees’ group policies, address gaps in tax policy application.
2. Courts can provide temporary relief and push for policy reconsideration benefiting vulnerable groups.
3. Such rulings show inequities and can catalyse broader reforms for fairness and social justice.
4. However, judicial decisions depend on ongoing hearings and may create uncertainty until final verdicts.
5. They ensure that tax laws do not disproportionately burden senior citizens, retirees, and non-salaried persons.
6. Judicial oversight complements legislative and executive actions in evolving equitable tax frameworks.