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What’s the Ongoing Story?
The recent 54th GST Council meeting focused on a key issue that could impact millions of Indians – the reduction of Goods and Services Tax (GST) on health and life insurance premiums. The council, chaired by Union Finance Minister Nirmala Sitharaman, acknowledged the need to bring down the tax rate on these premiums, currently at 18%. However, instead of making an immediate decision, the matter was referred to a Group of Ministers (GoM) for further deliberation. This proposal comes in the backdrop of increasing demand for affordable insurance, a sector crucial to financial security for Indian families, particularly after the COVID-19 pandemic.
The Council has been at the forefront of tweaking tax structures to balance revenue needs with citizen welfare. The need to reduce GST on insurance premiums is not just a tax policy issue but also reflects on the larger theme of financial inclusion and access to healthcare.
What is the GST Council?
The GST Council is a constitutional body responsible for making recommendations to the Union and State governments regarding the GST regime. Established under Article 279A of the Constitution, it was introduced to bring uniformity and simplicity in India’s indirect taxation system, where earlier both the Centre and states levied multiple taxes.
The Council is chaired by the Union Finance Minister and includes the Finance Ministers of all states. It plays a crucial role in deciding GST rates, determining which goods and services are subject to tax, and addressing issues like tax exemptions, rate rationalisation, and revenue distribution between the Centre and states.
The council promotes cooperative federalism, ensuring that both the Union and states have a voice in shaping tax policies that affect citizens across the country. Every decision made by the GST Council requires a three-fourths majority, with the Centre holding one-third of the votes and the states holding two-thirds.
What is the Group of Ministers (GoM)?
A Group of Ministers (GoM) is a temporary, consultative body formed to resolve specific issues under the GST regime. Comprising ministers from various states, the GoM is typically tasked with studying a particular problem, gathering inputs from stakeholders, and making recommendations to the GST Council.
The GoM on rate rationalisation, for instance, is responsible for ensuring that tax rates are fair and balanced, considering both revenue generation and the impact on the end consumer. In this case, the GoM will evaluate the proposal to reduce GST on life and health insurance premiums, a significant matter given the rising cost of healthcare and financial protection in India.
The Current GST Regime and Insurance
Under the current GST framework, a tax of 18% is levied on health and life insurance premiums. While the rationale behind this rate has been to maintain revenue neutrality, given the critical role insurance plays in financial protection, many stakeholders argue that this rate is too high.
In the financial year 2023-24, the Centre and states collected ₹8,262.94 crore in GST from health insurance premiums and ₹1,484.36 crore from reinsurance premiums. The opposition, led by leaders like Rahul Gandhi and Mamata Banerjee, has been vocal about scrapping or reducing this GST, as it imposes an additional financial burden on policyholders, particularly in a post-pandemic economy.
Key Takeaways from the 54th GST Council Meeting
Focus on Insurance: There was a broad consensus that the tax rate on life and health insurance premiums should be reduced. The final decision has been deferred to the GoM for further analysis.
Revenue Considerations: While reducing GST may benefit consumers, it could lead to a decline in revenue for both the Centre and states. Balancing these competing demands is the key challenge for the GST Council.
Political Push: Opposition leaders have called for a complete withdrawal of GST on insurance, emphasising the need for accessible and affordable healthcare and financial security, especially for middle-class and lower-income groups.
GST and Cooperative Federalism
The GST Council is one of the best examples of cooperative federalism in action. It ensures that both the Centre and the states have a say in decisions that affect their revenue streams. The equal representation of states in the council, combined with the need for consensus-based decision-making, fosters a collaborative approach to governance. While the Centre has the authority to impose taxes, the states play an equally important role in determining the tax structure, rates, and exemptions.
In this way, the GST Council also acts as a bridge between the Centre and the states, ensuring that states' concerns are heard and addressed, while national-level uniformity in taxation is maintained.
Constitutional Provisions Related to the GST Council
The GST Council was established under Article 279A of the Indian Constitution, inserted by the 101st Constitutional Amendment Act, 2016. The council is responsible for:
Making recommendations to the Centre and states on GST rates and exemptions.
Deciding the compensation mechanism for states.
Resolving disputes related to the implementation of GST.
Challenges Ahead
Reducing GST on health and life insurance premiums poses both opportunities and challenges. On the one hand, it would make insurance more affordable, increasing its penetration, particularly among lower-income groups. On the other hand, the Centre and states rely heavily on GST revenues to fund welfare schemes, infrastructure projects, and healthcare initiatives. Any reduction in GST must be balanced with the need to maintain fiscal stability.
Moreover, the insurance sector is crucial for financial security, and reducing the tax burden on policyholders could encourage more people to invest in health and life insurance, ultimately leading to broader financial inclusion.
The Way Forward
The decision to reduce GST on insurance premiums is a step in the right direction, aligning with the broader goals of financial inclusion and universal healthcare access. The referral of the issue to the GoM ensures that the decision will be well-considered, taking into account the need to balance consumer relief with fiscal responsibility.
For UPSC aspirants, understanding the GST Council’s role, its functioning within a federal system, and the significance of taxation reforms like GST is crucial for both Prelims and Mains. The ongoing discussions on insurance premiums highlight the importance of tax policies in shaping economic and social outcomes.
Prelims Questions
With reference to the GST Council, consider the following statements:
1. It is chaired by the Prime Minister of India.
2. Every decision in the council requires a simple majority vote.
3. The Council was established under Article 279A of the Indian Constitution.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) 3 only
(d) 1, 2, and 3
Answer: (c) 3 only
2. Which among the following is the responsibility of the GST Council?
(a) Determining the income tax slabs.
(b) Recommending goods and services to be exempted from GST.
(c) Implementing the Direct Taxes Code.
(d) Managing the fiscal deficit of states.
Answer: (b) Recommending goods and services to be exempted from GST
Mains Question
Q.) Discuss the role of the GST Council in promoting cooperative federalism in India. What are the challenges it faces in balancing revenue generation and consumer welfare?
This article provides a comprehensive analysis of the recent discussions in the GST Council regarding reducing the tax rate on insurance premiums, offering a balanced view of the economic and social implications. UPSC aspirants are encouraged to focus on the constitutional aspects of the GST Council, the role of the GoM, and how tax reforms can impact public welfare.
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