The Central Board of Indirect Taxes and Customs (CBIC) has issued new clarifications on input tax credit (ITC) rules and GST exemptions, with significant implications for insurers, hospitals, hotels and related industries.

From September 22, insurance companies will no longer be able to claim ITC on GST paid on commissions and brokerages related to individual health and life insurance policies. The change follows the GST Council’s earlier decision to exempt premiums on such policies from GST, reducing the rate from 18 per cent to zero. While this is expected to lower costs for policyholders, it also alters the economics of insurance distribution and administration.

Implications for Insurers and Policyholders

Until now, insurers availed ITC on a range of input services, including commissions, brokerage and reinsurance. Under the revised framework, reinsurance services remain exempt, but insurers must reverse ITC on commissions and brokerages tied to individual policies. This means that while consumers benefit from lower premiums, insurers will face an embedded tax cost on distribution expenses.

Industry experts note that this could pressure insurers’ margins, particularly as commissions form a significant share of acquisition costs. “The government wants that the end customer gets the maximum benefits out of these changes, therefore, has not allowed a dual-rate structure,” explained Rahul Shekhar, Partner – Indirect Tax at Nangia Andersen LLP.

For insurers, the trade-off is clear: reduced price sensitivity among customers but limited ability to offset intermediary costs. Group insurance, however, remains outside the exemption scope, allowing insurers to continue claiming ITC on related services.

Broader GST Impact Across Services

The CBIC clarification extends beyond insurance. Hotels supplying accommodation at ₹7,500 or below per day per unit, taxed at 5 per cent GST, will also not be able to avail ITC on inputs like toiletries or amenities. Similarly, providers of beauty and wellness services taxed at 5 per cent without ITC face the same restriction.

“This effectively treats such supplies at par with exempt services,” observed Rajat Mohan, Senior Partner at AMRG & Associates. “While customers enjoy lower rates, suppliers bear the embedded tax burden, requiring careful apportionment and reversal mechanisms.”

The rationale is rooted in simplifying compliance and reducing tax incidence for end consumers. However, for service providers, it raises operational complexity in apportioning input credits across taxable and non-taxable supplies. For example, if a hotel uses goods and services for both 5 per cent without ITC accommodation and 18 per cent taxable restaurant services, it must proportionately reverse credits linked to the exempt segment.

Healthcare Sector: Dual Effects of GST

For the healthcare sector, the GST reforms present both opportunities and challenges. On the one hand, exempting health and life insurance premiums is expected to improve penetration in a market where only 41 per cent of households currently hold coverage. By reducing costs to consumers, the measure could expand financial protection and reduce out-of-pocket spending.

On the other hand, insurers funding healthcare services will face tighter margins due to ITC restrictions. This could affect negotiations with hospitals over tariff structures, particularly at a time when disputes between providers and insurers - including recent conflicts over cashless claims - are drawing national attention. Hospitals may face delayed settlements or downward pressure on reimbursement rates as insurers adjust to the new cost regime.

The CBIC has also clarified GST rates on medical equipment and consumables. While many life-saving drugs have been moved to nil or 5 per cent, equipment for diagnostics and procedures continues under the 5 per cent slab without ITC. For hospitals, this ensures lower patient bills but sustains the challenge of unrecoverable input tax costs on infrastructure and consumables.

Bricks, Construction Inputs and Hospital Expansion

The impact of GST extends indirectly to healthcare infrastructure. With no major changes to brick taxation except for sand lime bricks (now at 5 per cent from 12 per cent), hospitals planning expansions must still navigate a cost environment where construction inputs attract GST of 6 per cent without ITC or 12 per cent with ITC.

As India pursues aggressive plans to expand district-level oncology and specialty centres under the Union Budget 2025 mandate, capital expenditure on infrastructure will remain influenced by GST mechanics. Developers must weigh whether to absorb unrecoverable costs under concessional rates or opt for higher slabs with ITC eligibility.

Pharmaceuticals and Pricing Compliance

For pharmaceutical companies, the CBIC reiterated that medicines already in the supply chain need not be recalled or relabelled after September 22, provided revised price lists are shared with dealers and retailers. This guidance follows the National Pharmaceutical Pricing Authority’s directive on ensuring that maximum retail prices reflect new GST rates.

The compliance challenge lies in managing stock already distributed before the effective date. “Similar issues will be faced by FMCG and retail sectors,” said Shekhar, urging broader clarification to ensure that reduced tax benefits reach end consumers without disruption.

Balancing Revenue and Affordability

The underlying theme across these clarifications is the government’s intent to prioritize affordability for end-users while simplifying GST compliance. The trade-off, however, shifts tax burdens onto service providers, requiring them to absorb unrecoverable input costs or restructure operations.

For insurance, the reforms could accelerate adoption but necessitate new cost management models. For hotels and wellness services, the focus is on consumer affordability, though operators face tighter margins. For hospitals and pharma, the changes reduce patient bills but perpetuate financial strain on providers who cannot fully claim credits.

Outlook for Stakeholders

The GST Council’s September reforms, described by analysts as among the most comprehensive since 2017, reflect an effort to recalibrate India’s indirect tax regime toward equity and access. In healthcare, the exemption of insurance premiums aligns with broader universal health coverage goals. However, insurers’ inability to claim ITC on commissions may lead to renegotiation of distribution models, digital sales and tighter scrutiny of broker relationships.

Hospitals and healthcare providers must adapt to changing cost structures, balancing lower patient bills with unrecoverable input tax costs. For policymakers, the challenge will be to monitor whether these reforms improve access without undermining provider sustainability.

As Rajat Mohan noted, concessional GST rates without ITC “simplify compliance and reduce incidence for end consumers, but require careful navigation by suppliers.” For a sector as sensitive as healthcare, this balancing act will remain under scrutiny in the months ahead.