Two weeks after the Goods and Services Tax (GST) on health insurance premiums was reduced from 18% to zero, insurers have announced that the agent commission will now be made inclusive of the 18% GST. The decision, which takes effect from October 1, 2025, has triggered intense debate across the insurance and tax ecosystems.

While the GST cut was designed to make health insurance more affordable for consumers, its accompanying withdrawal of Input Tax Credit (ITC) has disrupted the industry’s cost structure. The result: higher operating costs for insurers and lower earnings for distributors.

The Context: GST 2.0 and Structural Recalibration

The recent set of GST reforms – often dubbed as GST 2.0 – was aimed at rationalising rates and simplifying compliance, particularly for sectors like healthcare and insurance that are considered socially critical. By setting the GST on health insurance premiums to nil, the government sought to expand coverage and promote affordability.

However, in India’s value-added tax ecosystem, the design of GST links every input and output transaction. The credit mechanism ensures that taxes are levied only on value addition, preventing cascading effects. When output supplies are made exempt or zero-rated without ITC, this chain breaks.

The exemption on health insurance premiums, therefore, has a structural side-effect: it blocks ITC on input services and procurements – including rent, advertising, manpower, IT systems, and most notably, agents’ commissions.

What Changed Post GST 2.0

Before the reform, insurers collected 18% GST on premiums and were correspondingly eligible to claim ITC on their business expenses. The system ensured that GST paid on inputs like commission, technology, and marketing could be offset against GST collected on premiums.

Post-reform, the output supply (premium) became exempt. As per Section 17(2) of the CGST Act, when output supplies are exempt, ITC on inputs used for such supplies becomes ineligible. Consequently, every rupee of GST paid on inputs now becomes a cost to the insurer.

For a business where commissions constitute a major expense, this is significant. On every ₹100 paid as commission, insurers must now bear ₹18 as non-creditable GST. In a competitive industry where margins are already under regulatory caps, such an increase directly affects profitability and the Expense of Management (EOM) ratios prescribed by IRDAI.

The Immediate Response from Insurers

Faced with a regulatory mandate to pass the benefit of GST reduction to policyholders, insurers find themselves in a bind. They cannot recover ITC through output tax credits, nor can they inflate premiums to offset the cost increase. The logical response – now being implemented across the industry – is to make commission payments “inclusive of GST.”

In practical terms, this means the tax burden shifts to distributors and agents. For instance, where an agent earlier earned ₹100 as commission, the new structure reduces this to ₹84.74 after deducting 18% GST.

From an accounting standpoint, the insurer’s cost remains constant, but the agent’s income effectively declines by the GST component. This has caused deep concern among individual agents and smaller intermediaries, who form the backbone of India’s insurance distribution model.

Understanding the Tax Paradox

The underlying paradox arises from how exemptions interact with the credit chain in GST. A nil-rated output supply – though beneficial for the end consumer – breaks the ITC loop. If a product is taxed even at a concessional rate (say, 5%), partial credit flow continues. However, a complete exemption blocks credits on all inputs, resulting in “tax accumulation” within the supply chain.

In the case of health insurance, while the consumer enjoys a lower upfront cost, the industry’s embedded tax cost rises. The reform intended to make healthcare more affordable ends up increasing the compliance burden and distorting intermediary earnings.

This phenomenon is not new – similar distortions were observed in sectors such as education, where exemptions led to unrecoverable input taxes on capital expenditure and services.

Impact Across Stakeholders

1. For Insurers:

  • The effective cost of doing business rises, with unrecoverable GST now embedded in operating expenses.

  • Profitability margins narrow, particularly for health insurers operating under fixed pricing regimes.

  • EOM ratios may come under pressure, compelling companies to rationalise marketing and distribution costs.

2. For Agents and Distributors:

  • The immediate impact is a reduction in effective commission income.

  • Smaller distributors, especially individual agents in semi-urban markets, face viability challenges.

  • Corporate brokers and bancassurance partners may renegotiate commission structures or seek revised service agreements to mitigate the GST impact.

3. For Consumers:

  • The short-term benefit of lower premiums may be offset in the long term if insurers rationalise coverage benefits or limit distribution reach.

  • The availability of personalised insurance advisory, heavily dependent on agent networks, could reduce in rural and Tier-II markets.

Industry’s Strategic Adjustments

Insurers are adopting different strategies to balance compliance with business sustainability:

  • Inclusive Commission Models: Most insurers are transitioning to GST-inclusive commissions, ensuring cost neutrality for the company but lower take-home for agents.

  • Cost Rationalisation: Companies are re-evaluating operating expenses such as rentals, outsourcing, and marketing spends – all of which now carry unrecoverable GST.

  • Digital Distribution Push: The shift may accelerate adoption of online sales channels, where acquisition costs are lower and tax pass-through is simpler.

  • Policy Repricing and Product Redesign: Over time, insurers may re-engineer products to maintain margins without breaching regulatory price caps.

Implications for the Tax Framework

The situation highlights a classic policy tension between social objectives and tax design integrity. While the exemption supports public welfare, it disrupts the value chain efficiency that GST was designed to ensure.

From a policy standpoint, it may prompt the government and GST Council to revisit how exemptions are structured. A reduced-rate regime (say, 5%) instead of a complete exemption could maintain affordability while preserving partial ITC flow. This approach has been used successfully in sectors like education services and essential goods.

Moreover, insurers may seek clarificatory relief under Rule 42 of the CGST Rules, 2017, which deals with the reversal of ITC for exempt supplies, to ensure proportional rather than absolute disallowance in mixed supplies scenarios.

Conclusion

The shift to nil GST on health insurance premiums exemplifies the delicate balance between fiscal intent and economic execution. While the reform rightly aims to ease the burden on policyholders, its ripple effects expose the complexity of India’s tax architecture.

For insurers, distributors, and policymakers alike, this development serves as a reminder that in the world of indirect taxes, every exemption has a cost – often hidden, but always consequential.