The Goods and Services Tax (GST) was implemented in the year 2017 wherein only a single tax would cover an array of taxes levied on various goods and services. Since health insurance comes under the category of services, the GST rule would have an effect on the cost of health insurance too.
Read further to learn about GST and how it affects the premium payable towards health insurance plans.
The GST bill had been left pending for a long time in the Lok Sabha but was finally passed in August 2016. After several discussions, debates, and strategy planning, the new tax regime came into effect in July 2017.
The GST is basically a value added tax that eliminates the double taxation that could arise down the value chain. Thus, taxes such as the luxury tax, excise duty, entertainment tax, VAT, service tax, etc., Have all been merged into a single tax i.e. GST. The GST for all goods and services, however, has two components – State GST and Central GST. Based on the type of good or service, the GST rates (both, central and state) have been decided uniformly. Therefore, with the implementation of GST, the entire indirect tax system of India has been simplified and a sum total of 17 taxes have been replaced.
Initially, before the GST regime was put in place, the service tax rate for health insurance was 15%. This included the basic service tax equal to 14%, Swachh Bharat Cess equal to 0.5%, and Krishi Kalyan Cess equal to 0.5%. But with the implementation of the new GST rule, the tax rate was hiked by 3%. So, the tax rate applicable to health insurance is currently 18%. New policy buyers, as well as those who wish to renew existing policies, have to follow the new GST rule.
Let’s understand the impact of the change in tax rate on health insurance premiums with the help of an example:
Assume Mr. X had purchased a health insurance plan that offers a sum insured amount of Rs.8 lakh for which the annual premium payable is Rs.20,000. As per the earlier tax regime, the tax applicable in this case would have been 15% of Rs.20,000 which is equal to Rs.3,000. But with the implementation of GST, the tax payable is Rs.3,600. So, Mr. X will have to pay an annual premium equal to Rs.23,600 instead of Rs.23,000, for his Rs.8 lakh health insurance cover.
The health insurance premiums have definitely increased due to the hike in the tax rate. However, this has tightened the completion between insurers. In order to get more customers to buy their products, insurers offer health insurance plans at lower and more affordable prices. They choose to cut down on certain costs such as the expenses incurred on issuing the policy. Also, they make their policy-buying process and claim registration process simpler so that better services attract more prospective insurance holders. This way, the implementation of GST has improved the quality of services offered by health insurers in general.
The new tax regime applies not only to the prospective policy buyers but those who currently hold policies too. So, there’s no way out for policyholders and they are forced to pay the revised rates. Also, individual policyholders will no longer be able to input tax credits and group policyholders will also not be able to reap the tax advantage as insurance is considered a service that benefits an individual. Thus, to understand the tax structure and its details better, it is best to consult a financial expert.
The cost of a health insurance plan is definitely a very important factor that should be looked into while choosing the right plan. However, one should not zero in on a plan only because it is cheaper. A prospective health insurance buyer should take into consideration the features and benefits of the plan and analyse if they are suitable for him/her. Only then should he/she seal the deal and pay the premium amount.
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