Why high GST rate on insurance is a bad idea

Hindustan Times

4 hours ago

It is an idea that was floated by a senior minister in the Narendra Modi government after the 2024 Lok Sabha results. And it's getting closer to reality. HT reported on Thursday that the Union government has sent a proposal to the group of ministers in the Goods and Services Tax (GST) Council to do away with GST on insurance premiums for health and life insurance policies. From an 18% tax to no tax at all, this will provide significant relief to policyholders. The policy change, if implemented, will especially benefit taxpayers in the new tax regime. They are not entitled to any deductions in taxable income on account of expenses such as insurance premiums. Hopefully, this will free up some, even if little, disposable income for spending on other things and also help reduce the cost of insurance in the country. In fact, the government should make sure that insurance companies do not increase their premiums to neutralise the cost-saving effect of the possible abolition of GST on insurance premiums. The government should make sure that insurance companies do not increase their premiums to neutralise the cost-saving effect of the possible abolition of GST on insurance premiums. (@FinMinIndiaX via PTI)
To be sure, it is eminently arguable that the move is aimed at affecting public perception rather than the macroeconomy at large. Insurance coverage, especially health insurance, is growing rapidly in India, especially among the middle classes. Taxing it at 18% was never a fair idea, given the fact that insurance is something one buys for a potential crisis. It is not a luxury or sin-spend. But should it have been made completely tax-free? There is a fine line between political populism and fiscal prudence, if not in tax collections, then in the idea of taxation itself. Creating tax-free goods and services categories can often erode the sanctity of the latter.