States favour Centre's proposal to exempt GST on individual life, health insurance policies

New Delhi: GST on individual life and health insurance policies is likely to be exempt soon as states on Wednesday favoured the Centre's proposal to bring tax on such premium payments to 'nil' from the current 18 per cent.

Groups of Ministers (GoMs) on Health and Life Insurance, and Compensation Cess met on Wednesday to discuss the Centre's proposal of 'next-gen' GST reforms, aiming at two tax rates of 5 per cent and 18 per cent, along with a special 40 per cent rate on 5-7 items, including sin goods.

Ahead of the GoM meetings, Union Finance Minister Nirmala Sitharaman, in her address, talked about the GST reform proposal. She said that the reform would be in the direction of making India Atmanirbhar.

Speaking with reporters after the meeting of the GoM on health and life insurance, Bihar Deputy Chief Minister Samrat Choudhary, who is also the convenor of the panel, said that all states have agreed to the Centre's proposal for a reduction in tax rate on individual life and health insurance policies, with some expressing reservations.

"The Centre's proposal is clear that individual insurance policies should be exempt from GST. This has been discussed by the GoM which will present its report to the Council. A final view on tax rates will be taken by the Council," he said.

At present, 18 per cent GST is levied on premiums paid on health and life insurance policies.

In 2023-24, the Centre and states collected Rs 8,262.94 crore through GST on health insurance premium, while Rs 1,484.36 crore was collected on account of GST on health reinsurance premium.

The GST Council, chaired by Sitharaman and comprising all state ministers, is likely to meet next month. Prime Minister Narendra Modi had announced in his Independence Day speech that GST reforms would be a Diwali gift for citizens.

Telangana Deputy Chief Minister Mallu Bhatti Vikramarka said the annual revenue loss for GST relief on insurance is Rs 9,700 crore. "We made it clear that the GST reduction benefit should go to policyholders and not companies. Some mechanism has to be developed so that the rate cut benefit reaches the people. The GST Council will decide a mechanism." Separately, the GoM on Compensation Cess, chaired by Minister of State for Finance Pankaj Chaudhary, discussed the way forward once the levy ends on October 30, but no alternative mechanism was suggested.

The six-member GoM on GST rate rationalisation, chaired by Samrat Choudhary, will meet on Thursday to discuss the rate and slab rejig proposal placed by the Centre.

"The Central Government remains committed to building a broad-based consensus with the States in the coming weeks to implement the next generation of GST reforms in the spirit of cooperative federalism," the finance ministry said in a post on X.

As per an SBI Research Report, the Centre's GST reform proposal could cost Rs 85,000 crore to the exchequer annually, but will give a Rs 1.98 lakh crore consumption boost to the economy as tax cuts will bring down prices and spur spending.

The GoM on compensation cess also discussed the revenue implications of the cess levy coming to an end. Some states, including Punjab, voiced concern over revenue loss pre and post GST.

"Punjab is losing Rs 21,000 crore every year post GST rollout. The GoM meeting on Wednesday took views of all the states. The GoM has not yet proposed any alternative mechanism when the compensation cess ends. We were informed today that the back-to-back loan will be repaid by October, post which compensation cess will not be levied," Punjab Finance Minister Harpal Singh Cheema told reporters.

The Centre has borrowed and released Rs 2.69 lakh crore during the Covid pandemic to make up for goods GST revenue loss suffered by states. To repay the loan, the cess period was extended from June 30, 2022, till March 31, 2026, only to retire debts taken on behalf of states to meet the revenue shortfall during the Covid period.

While states currently have no claims for compensation from July 1, 2022, the cess levy will continue till the Rs 2.69 lakh crore loans are repaid, which is October 30, 2025.

With the compensation cess period coming to an end with loan repayment and the need for tax rate rationalisation after 8 years of GST, the Centre has proposed a "reformed and refined" taxation structure which is expected to reduce classification disputes and do away with duty inversion.

The Centre's proposal on GST reforms is based on three pillars-- structural reforms, rate rationalisation and ease of living.

GST is currently levied at 5 per cent, 12 per cent, 18 per cent and 28 per cent. While food and essential items are either at nil or 5 per cent rate, luxury and demerit goods are in 28 per cent slab, with a cess on top of it.