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Service tax holiday for base-level health insurance a must
February, 13th 2016

At the beginning of the millennium, a study by the World Bank (2001) noted that at least 24% of all people hospitalized in India in a single year slipped below the poverty line because they were hospitalized. The unfortunate truth, and biggest motivation to augment base-level health insurance, is that a large number of people in our country borrow money or sell assets to pay for their hospitalization expenses/medical treatment.

Under-penetration of health insurance

Over a decade later, despite all the developments in the sector, health insurance products are still severely under-utilized, with a little over a tenth of the population covered by health insurance. According to the World Health Organisation (World Health Statistics, 2010), 80% of India’s total healthcare spend came from out-of-pocket sources.

Statistics from the World Health Organization in 2011 revealed that amongst the BRICS nations, India’s out-of-pocket expenses on health insurance at 86% were second only to Russia (87.9%) and followed by China (78.8%), Brazil (57.8%) and South Africa (13.8%).

Further, although it is one of the fastest growing segments of the Indian insurance sector, with health insurance premiums registering a compounded annual growth rate (CAGR) of 32% between 2005 and 2013, per capita spending on health insurance still lags behind comparable emerging economies and the world.

Rising healthcare costs, due to a combination of the increasing incidence of new and fatal diseases and rising healthcare costs underline the need for accessible and affordable health insurance.

A multi-pronged approach to augmenting the coverage of health insurance, especially to those in the low income bracket, could be effected by offering simple yet focused tax incentives:

Additional benefits to MSMEs that insure their employees: The MSME sector is the largest provider of employment in the economy, after the agricultural sector, offering jobs to 1114.29 lakh people in 2013-14 (MSME Annual Report 2014-15). This segment is also known to have a growing presence in the hinterlands and less developed regions of the country. Encouraging such enterprises to provide health insurance to their employees would go a long way towards expanding the overall coverage.

At present, under section 36(1)(ib) of the Income Tax Act, the premium paid by an employer towards the health insurance of employees can be considered as a business expenses and is allowed as a deduction. However, MSMEs and other corporates could be offered an additional incentive in the form of an income tax break that is equivalent to the amount spent on insuring employees, especially those with a basic salary that falls below a certain marginal level (but above Rs.15,000 i.e. those qualifying for ESIC coverage). This will have the dual benefit of extending health insurance coverage to the marginalised and promoting MSMEs, which directly translates into sustainable economic growth.

Service tax holiday for base-level health insurance policies: There is currently a deduction available under section 80D of the Income Tax Act for medical insurance premiums paid by an individual (for the health cover of the assess or that of the spouse or dependent parents or children) or an HUF (for the health cover of any member of the family). This deduction for the current year is to the extent of Rs 25,000 for those below the age of 60 years and Rs 30,000 for senior citizens and is over and above the deduction allowed under section 80C. Accordingly, a benefit of between Rs 25,000 and Rs 60,000 is rendered to the tax payer, depending on the age and number of insured (see table).

As things stand, a tax payer enjoys tax benefits by purchasing health insurance for herself or her dependents. But it beckons the question: What relief do the lowest income earners – those who do not fall into the income tax net – derive from purchasing health insurance? The ironic answer is that they pay a tax of 14.5% (service tax) on the health insurance that they purchase.

In all fairness and to promote the penetration of health insurance within those segments of society that need it the most, a tax holiday should be given on base-level policies that have a certain minimal level of annual premium (approx. Rs.3000 p.a./life) or coverage.

A year ago, the Finance Minister Shri Arun Jaitley rightly stated that the benefits of our demographic dividend will flow only if our population is healthy, educated and properly skilled. With over a quarter of our population between the age group of 10-25 years, there will never be a better time to initiate a wider coverage of health benefits than the present, if we seek to reap and enjoy sustainable dividends for the country in the future.

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