The GST Council is likely to consider providing relief to employers offering group health and life insurance policies to employees at its September 12 meeting, including changes to the current restrictions on input tax credit (ITC), sources said.
The Council may allow employers to claim ITC on the goods and services tax (GST) paid on such policies, a benefit currently restricted under GST law, the sources said.
Employers currently pay 18 percent GST on group health and life insurance policies procured for employees, while individual policies remain exempt. ITC on such insurance is also generally restricted, subject to specified exceptions. Where insurance must be provided under law, such as for workers engaged in a hazardous industry, ITC can be claimed.
For employers that purchase group insurance as an employee benefit, the GST paid on the premium would generally become a cost where the statutory exceptions for ITC are not satisfied. This creates a significant distinction between individual policies, which are now exempt, and group policies, where both the 18 percent GST levy and the ITC restriction continue to have a direct cost impact on employers, the sources said.
According to sources, the GST Council’s law committee in July suggested lifting ITC restrictions on group life and health insurance policies provided by employers.
“The Council is likely to discuss lifting the restriction on input tax credit for health and life insurance taken by companies for their employees. However, the proposal to the Council is primarily aimed at group health insurance rather than life insurance,” one of the people cited above said.
“Since companies typically provide health insurance rather than life insurance to employees, the proposed change would mainly benefit group health insurance. Non-life insurance products, including fire and water and vehicle insurance, will continue to be taxed at 18 percent, with input tax credit already available,” the person added.
Allowing ITC on employer-sponsored group health and life insurance could help reduce costs and restore tax neutrality, while potentially encouraging employers to offer richer coverage, tax experts said.
“Right now, 18 percent GST plus a blocked credit makes group insurance an embedded cost rather than a creditable one, purely because it’s procured collectively rather than individually. This is an odd asymmetry given that this cover is effectively part of employee compensation,” an tax expert said.
