The states continue to remain divided over a proposal to exempt health insurance premium from Goods and Services Tax (GST), with the Fitment Committee, comprising revenue officials from both the state and Union governments, struggling to reach a consensus on the contentious issue.

A decision to this effect is likely to be taken during the upcoming GST Council, chaired by Union Finance Minister Nirmala Sitharaman, meeting to be held in Delhi on September 9.

Various options, including exemptions for senior citizens, partial exemptions, or reducing the tax rate of 5 percent with or without the Input Tax Credit (ITC), are still under discussion, according to two officials, who are privy to the matter.

The proposal to exempt health insurance premium from GST has sparked a debate amid states expressing concerns about the potential revenue loss, which is likely to range between Rs 3,200 and Rs 4,000 crore. However, the final loss figure depends on the retention of ITC, the officials said.

“There are nuances to the tax system. Some states are conscious of the revenue implications of exemption of health insurance premium from GST. Some are very conservative, while others feel that lower tax could lead to a wider coverage of health insurance. The overriding sentiment is that whatever losses are suffered due to the tax relief could be recouped by other sectors, thanks to a growing economy,” an official told Moneycontrol.

ITC remains a bone of contention

“If GST on health insurance is proposed at 5 per cent without ITC, then the tax burden is inclusive of the 5 per cent tax rate and additional tax on inputs. In such a scenario, the government will continue to levy tax on inputs. As a result, some revenue will accrue to the government for discharging its output liability. This policy move will also lessen revenue loss for the state exchequer,” the official said.

At present, health insurance premium attracts a GST of 18 per cent. The debate around withdrawal of the GST has been raging for a while.

Days after Sitharaman tabled the Union Budget 2024-25 in the Lok Sabha; Minister for Road, Transport, and Highways, Nitin Gadkari, advocated for the exemption of health insurance from the GST. He expressed concerns about the impact of the 18 per cent GST on the accessibility and growth of health insurance.

The deadlock is yet to be resolved since states are seeking more data and deliberating on the most feasible approach to balance consumer relief with revenue protection.