Lower or Nil GST negative for insurance sector, industry sources say

The government is considering a steep reduction in GST for health and life insurance, from the current 18% down to 5% or even zero, as part of a sweeping GST overhaul alongside cuts on small cars, according to sources in the know.Insurance industry leaders caution that slashing GST to 5% or Nil, but disallowing the Input Tax Credit (ITC), will erode margins and fail to reduce premiums. Under current rules, insurers claim back GST paid on everything from IT services to admin costs, offsetting the GST they collect from customers.

Without the ITC, these added costs become a liability and would most likely get passed on to policyholders, a move that could offset any intended benefits of a lower taxation rate.

Industry sources told CNBC-TV18 exclusively that a Nil GST without ITC will squeeze margins and offer no scope for a cut to premiums.

• At 18% GST with ITC, insurers can offset costs and potentially pass on savings.
• At 5% GST or Nil GST Without ITC: Premiums may rise due to blocked credit.
• At 12% GST With ITC: Could be a sweet spot by insurers and delivers some relief while protecting liquidity and pricing stability.

While the government’s proposed GST cut for insurance is aimed at making health and life insurance more affordable, insurers argue that without Input Tax Credit, the move could do more harm than good, raising operational costs and thereby hurting consumers.Many within the industry are pushing for a compromise, which a moderate rate cut (potentially to 12%) combined with ITC, which could balance affordability, insurer sustainability, and government revenue goals.

The final decision rests with the GST Council, which must consider revenue implications, industry feedback, and consumer impact before rolling out reforms by October.