Understanding the Impact of GST on Health Insurance: Changes in Rates and Policies

GST on Health Insurance: Impact and Rate Changes

GST, introduced on July 1, 2017, revolutionised India's tax system by merging indirect taxes like service tax, VAT, and excise duty into a single, streamlined tax structure. One significant sector impacted by this change is health insurance. The introduction of GST has led to notable changes in the taxation of health insurance, influencing personal financial planning and healthcare safety nets.

This blog will explore how GST affects health insurance rates and what these changes mean for policyholders and insurance companies.

Comprehensive GST On Health Insurance Coverage

GST Structure

GST on health insurance has four different tax slabs: 5%, 12%,18%, and 28%. The category determines the rate one pays for a particular good or service. Health insurance falls within the financial services category. Hence, an 18% GST was levied, higher than the previous % service tax rate of 15%.

Pre-GST Scenario

Before the introduction of GST on health insurance, premiums were subject to a service tax at a flat rate of 15%. Policyholders paid this tax on top of their premium amounts. Also, insurance companies levied indirect taxes such as VAT on goods and services they used, which caused double taxation.

GST Impact on Health Insurance

Rising Premium Charges

The immediate consequence of GST on health insurance was an increase in premium costs for health insurance policyholders. A 3% extra payment was necessary for policyholders due to the shift from a 15% service tax to an 18% GST. For example, if a policy had an annual premium of INR 10,000, the same was INR 1,500 in service under service tax and increased to INR 1,800 in GST.

Client's Response

The rise in GST on health insurance premiums resulted in mixed reactions among policyholders. A few saw it as a nominal hike and stayed with their previous policies, while others, especially those with small budgets, rethought their health insurance alternatives. Some of these considerations included moving into policies with lower premiums or even reducing the sum insured to manage costs more efficiently.

Input Tax Credit (ITC) for Insurers

One significant change GST on health insurance brought about was the introduction of the Input Tax Credit (ITC). Under this framework, insurers could claim ITC on all goods and services purchased to facilitate health insurance coverage.

Administrative Adjustments

Insurance companies made substantial administrative adjustments to comply with GST regulations. These included changes in billing systems, retraining staff and ensuring all transactions were compliant with GST on health insurance requirements. Consequently, insurers invested time and resources to enable them to pass through this transition period.

Wider Implications on the Healthcare Sector

Boosting GST on health insurance had wider implications for the healthcare sector. The result is that high premiums may reduce the accessibility and affordability of health insurance. It impacts financial protection for insured persons against medical expenses. Consequently, this might lead to higher out-of-pocket payments within healthcare, translating into overall impacts on the country's healthcare system financing.

Changing Rates and Policy Dynamics of GST On Health Insurance

GST Initial Rate and Following Variations

When it was launched in 2017, the initial rate for GST on health insurance was 18%. The insurance industry and policyholders requested that this rate be reduced, but health insurance is an essential service, so the rate has remained at that level.

Advocacy for Lowering the Rate

Both consumer advocacy groups and the insurance industry have been very clear in demanding a reduction in the GST rate on health insurance. Their concern is based on the fact that health insurance is important as it provides financial coverage against medical costs. Adjusting the GST on health insurance rates would mean more affordable medical coverage for a larger section of India's population.

Government’s Position

Various factors influence the government's insistence on maintaining an 18% GST on health insurance. The government believes that healthcare services are fundamental, yet it must assess their implications for revenue generation within the public finance context. Adjustments to these GST on health insurance rates will lead to reduced revenues. They will affect the overall collection of goods and services taxes, thus affecting fiscal equilibrium.

Policy Recommendations and Future Outlook of GST On Health Insurance

Rationalising GST Rate

One of the key recommendations is to rationalise the GST on health insurance. Reducing it to 12% or 5% from 18% would make health insurance considerably affordable. This would be consistent with the move towards universal health coverage and reduce some burden for policyholders.

Enhancing ITC Benefits

The other recommendation is that insurance companies improve their ITC benefits. If insurers can claim ITC and get refunds in time, their expenditure management capacity could improve, leading to lower premiums payable by policyholders.

Promoting Health Insurance Literacy

It is essential to increase people's knowledge of GST on health insurance. Informing them about its merits and possible tax implications will enable them to make rational choices. Hence, the government, alongside industry stakeholders, may combine forces to roll out awareness campaigns and financial literacy initiatives.

Monitoring and Adjusting Policy

The monitoring framework should continually assess GST's impact on health insurance. The government must consider periodic reviews of this rate and its consequences on the sector. These regular assessments of GST on health insurance enable appropriate changes to be made so that a broader directive on healthcare accessibility, while guarding against financial risks, can be supported by GST on health insurance design.

Kinds of GST on Health Insurance

Goods and Services Tax (GST) is a comprehensive indirect tax that applies to manufacturing, selling and consuming goods and services throughout India. About health insurance, the premiums paid by policyholders are affected by GST. The rate of GST on health insurance applicable is 18%, which remains flat across different health insurance products.

Nevertheless, different types of GST may be levied on health insurance, such as Central GST (CGST), State GST (SGST), and Integrated GST (IGST). Here's a detailed explanation of GST on health insurance types:

Central GST (CGST) and State GST (SGST)

When GST on health insurance is applicable within a state, the premium payment is shared equally between the central and state governments regarding tax liability. This means that 18% GST will be broken down into 9% CGST and 9% SGST.

· Central Goods and Services Tax, or CGST, refers to the levy the central government imposes on intra-state transactions.

· State Goods and Services Tax or SGST means taxes imposed on intra-state transactions collected by state governments.

For example, if you buy an annual premium for a health policy in your state at Rs 20000, the applicable GST would be 9% CGST plus 9% SGST, totalling Rs 1800 (Rs 900 CGST+ Rs 900 SGST).

Integrated GST (IGST)

When individuals obtain health insurance from companies operating in different states, IGST applies. The 18% GST on health insurance goes to the central government, which splits this tax between itself and several other state governments relying upon predetermined policies.

· Integrated Goods and Services Tax, abbreviated as IGST, is a duty introduced by the central government on trans-state trades.

Let's say you bought your medical coverage from an insurer located in a different state than yours. Its annual premium was ₹20,000. The GST applicable in this case is 18% IGST, which equals ₹3,600.

Scenarios Illustrating GST Application on Health Insurance

Intra-State Transaction Example

· Premium Amount: ₹20,000

· CGST (9%): ₹1,800

· SGST (9%): ₹1,800

· Total GST: ₹3,600

· Total Premium Paid: ₹23,600

Inter-State Transaction Example

· Premium Amount: ₹20,000

· IGST (18%): ₹3,600

· Total GST: ₹3,600

· Total Premium Paid: ₹23,600

GST On Health Insurance and HSN Codes

GST on health insurance is a term that falls under the service sector in the realm of Goods and Services Tax (GST) in India and consists of specific codes as well as their rates.

Rate of GST On Health Insurance

The rate of GST on health insurance to be charged for health insurance services is 18%. The percentage is universal across various kinds of health policies. It also applies to premiums paid on individual health policies, group health policies and other GST on health insurance policies.

HSN Codes for Health Insurance

HSN, or Harmonised System Nomenclature, is a standard classification system using names and numbers in trade products. When it is applied to GST on health insurance, the correct term would be SAC or Services Accounting Code. It is used to identify the nature of goods supplied or services provided.

SAC Code for Health Insurance

The code assigned is 997133, specifically for insurance companies operating within India, which fall under "Financial and related services; insurance and pension services."

Importance of HSN Codes

HSN codes are indispensable for GST on health insurance and accounting purposes:

· Tax Calculation: This is where HSN codes assist in deciding the right GST on health insurance rate for a given service. When it comes to health insurance, applying the 997133 HSN code can be employed to ensure that it is a service and that the relevant GST tax rate is 18%.

· Input Tax Credit (ITC): Insurance companies pay for different services and expenses associated with their operations to get an input tax credit on the GST on health insurance. They need to use the correct HSN code. Consequently, this may result in lowered GST on health insurance premium rates, which would reduce the overall tax burden of these entities.

· GST Filing: Ensuring proper HSN coding guarantees that tax returns and reports are true reflections of facts. This is important for regulatory compliance and transparency reasons.

Tax Saving under Section 80D

Obtaining medical insurance protects you from financial costs in the event of a health emergency and consequently reduces your tax liabilities greatly. If you take an individual policy insuring yourself and your family, you get a deduction of up to Rs. 1 lakh under section 80D of the Income Tax Act.

Moreover, premiums paid towards such policies and expenses on preventive health checkups are also deductible. For instance, one may receive a maximum exemption for preventive health checkups worth Rs 5000 annually. Changes affecting taxation are subject to updates from the annual budget and other related updates.

How to Calculate GST on Health Insurance Premiums

Calculating GST on health insurance premiums is straightforward but requires special attention to detail for precision. First and foremost, the rate of GST on health insurance premiums is 18%, a uniform rate across all types of health insurance products. This applies even when purchasing insurance for individuals, families or groups. Understanding this fixed GST on health insurance rate is very important as it acts as a basis for working out the total amount payable.

When an individual with a policy pays their health insurance premium, the first thing that must be done is to identify the base premium amount. It is basically what one would have paid for their policy if there were no taxes. After determining the base premium, you can apply GST on health insurance at 18%. However, how GST on health insurance is calculated varies depending on whether it's an intra-state or inter-state transaction. For instance, an "intra-state" transaction refers to purchasing an insurance policy in the same state where taxes equally divided between the central government and state government are collected by way of CGST respectively from the 18% GST.

For example, if someone purchases health insurance worth ₹20,000 within their state as the basic premium value, calculating its GST involves adding 9% CGST and another 9% SGST. This results in an additional ₹1,800 for each, making a total of ₹3,600 in GST. Therefore, the total cost, including tax, becomes ₹23,600, representing the net premium cost.

In the case of an inter-state transaction taking place whereby someone buys an insurance policy from an insurer in some other state, slight changes happen in how GST on health insurance works here instead of dividing it into CGST and SGST. The entire 18% GST is called IGST (Integrated Goods and Services Tax). In the same way, if a health insurance policy's base premium is ₹20,000, the IGST applied would be 18% of ₹20,000. It will cost you ₹3,600. Therefore, the total payable premium for inter-state transactions equals ₹23,600.

These computations underscore why it is essential to correctly identify whether a particular transaction is intra-state or inter-state to apply GST on health insurance with this categorisation. Furthermore, it is critical that insurance companies clearly state their charges to reflect the correct amount of GST on health insurance on the policyholder's invoice. Proper invoicing ensures compliance with tax regulations and provides transparency to policyholders about the breakdown of their premium payments.

Calculating GST on health insurance premiums requires determining what one would have paid for their health insurance if there were no taxes. Then, 18% will be added at once, and transactions will be divided based on intra-state or inter-state taxation systems. The resultant GST on health insurance amount will then be added to the base premium, thus giving the total premium payable. This process may look simple, but it is very important since any mistake may lead to billing inaccuracies or noncompliance with the Indian GST framework, therefore resulting in penalties and other fines that may arise from it.

Reasons to Have a Health Insurance Plan

Health insurance is an essential component of financial planning and personal well-being. It guarantees a safety net that helps individuals and their families handle medical expenses by ensuring access to quality health care without costing them much. Here are certain reasons why you will need a health insurance plan:

Financial Protection against High Medical Costs

Medical treatments, especially for severe illnesses or emergencies, can be expensive. Hospitalisation, surgeries, diagnostics, and medication costs quickly pile up and weigh heavily on one's finances. A health insurance plan takes care of most of these costs, relieving the burden on your savings and reducing out-of-pocket expenses.

Access to Quality Healthcare

With GST on health insurance, you will hardly hesitate to seek quality healthcare. Most insurance plans are tied up with network hospitals (including individual clinics and physicians), where you get cashless treatment. The network thus leads to quick and efficient healthcare services. It would otherwise cost you much more than what you can afford.

Preventive Care and Early Detection Most health insurance policies cover preventive care services such as annual checkups, disease screenings, and immunisations. These offerings are critical for the early detection and prevention of illness. They consequently guarantee better health outcomes with reduced medical bills in the long run. Early diagnosis enables timely intervention, hence lessening the impact and cost of treatments.

Comprehensive Coverage

Modern-day health plans provide extensive coverage that goes beyond basic hospitalisation. This might entail outpatient treatment benefits, maternity coverage, and mental therapy options, among many others. Further, they may cater for alternative therapies like acupuncture and even wellness programs. Being exhaustive ensures various healthcare needs are attended to, promoting total well-being.

Tax Benefits

In India, premiums paid towards medical coverage qualify for tax deductions under section 80D of the Income Tax Act. This lowers your taxable income, leading to large tax savings. Healthcare becomes a prudent financial decision and not only an act of safeguarding your health for tax purposes.

Peace of Mind

The biggest benefit of having a medical insurance cover is the peace of mind that it brings. Knowing that you are financially covered in case of any medical emergency allows you to concentrate on getting well instead of worrying about how much it will cost. This kind of certainty is priceless, particularly during times when people have serious illnesses.

Coverage for Family Members

Healthcare plans can also cater to family members rather than just individuals. Family floater plans provide health insurance coverage for all members of your family under a single premium. It is, therefore, very good when one wants to protect his/her kids, husband/wife, or even parents from incurring the costs associated with ill health.

Protection Against Lifestyle Diseases

Modern sedentary lifestyle has contributed to the rise in cases related to lifestyle diseases such as diabetes, hypertension and cardiovascular problems. Health insurance covers such chronic conditions and is meant to ensure you get through them without necessarily experiencing a lot of complexities due to financial issues.

Add-on Personal Health Insurance and Riders

Optional extras or riders are common in medical insurance covers that boost the basic coverage. These can be personal accident cover, critical illness cover, daily hospital cash, etc. Your health insurance is more reliable and client-centred.

Importance of No Claim Bonus (NCB)

Some health plans provide a No-Claim Bonus (NCB) for every claim-free year. This NCB could come as an enhanced sum insured at no additional cost, or as a discount on the premium payable during the subsequent period. Thus, by not being sick and claiming compensation, NCB enhances the worth of your medical insurance over time.

GST On Health Insurance Should Continue

The introduction of GST on health insurance led to significant changes, such as premium costs rising due to an 18% tax levy. However, this was challenging for both policyholders and insurers, who were given some relief through the input credit mechanism (ITC).

GST for insurance premium continues advocating for a lower rate, highlighting how crucial medical coverage is. Therefore, GST on health insurance should continue, as fiscal considerations are weighed against affordability in healthcare payments, necessitating policy adjustments. Additionally, this objective can only be achieved if GST on health insurance rates are rationalised and ITC benefits enhanced. Hence, it allows all individuals access to affordable health insurance.

Besides, consideration of GST on health insurance policies becomes important because they touch upon many aspects of healthcare financing and financial security for the policyholders.