GST cut: The government recently reduced the GST rates for the service sector, and at first this looked like good news. Hotels, gyms, restaurants and even beauty and wellness services saw their GST rates drop. But many people in the industry are upset because the new system does not allow them to claim refunds or input tax credit. They say the tax burden still feels heavy, and they hope the government will change more rules later to help them.
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Experts are pointing out that this is a tricky situation for service businesses. One GST expert explained, “Take, for example, the hotel sector, or the gyms. 5% GST without input tax credit would mean that they will have to revise the prices. The same is the situation with the other services. This is a real challenge for the hotels and gyms. This issue pertains mainly to the services sector.”
According to the government release after the GST Council meeting, hotel rooms costing up to ₹7500 a night will now come under 5% GST without input tax credit. Earlier, they attracted 12% GST with ITC. Beauty and wellness services have also shifted to 5% GST without ITC, compared to the earlier 18% with ITC.
Insurance sector hit hard
The insurance industry has also been deeply affected. GST has now been fully removed from life insurance and health insurance premiums, but this exemption creates a new problem. Insurers are no longer allowed to claim input tax credits on the services they use. The Chairman of CBIC has already said that neither inversion benefit nor input tax credit will be given to the insurance sector.
Karthick Jonagadla, smallcase Manager and Founder of Quants Research, explained the impact clearly.
He said, “Under GST, insurers can credit input taxes on IT, TPAs, call centres and distribution; if premiums are made exempt, CGST Act 17(2) blocks ITC, turning vendor GST into embedded cost.” This means that insurers still pay GST on services they use, but now they cannot recover it, so it becomes an added expense. In the end, this cost is passed on to customers in the form of higher premiums.
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Section 17(2) of the CGST Act is the rule that blocks insurers from claiming ITC once their services are exempt. This makes the whole system more expensive for them. The tax they pay on IT, distribution or third-party services cannot be adjusted anymore, so the amount gets added to their operational cost. That extra cost flows into the price of insurance, making it harder for people to get cheaper policies even after GST was removed.
Premiums may not fall
Jonagadla also pointed out that GST exemption on insurance is limited, and health premiums keep rising every year. He gave numbers to show how tough the situation is. ICICI Lombard’s Q1FY26 combined ratio stood at 102.9%, New India Assurance at 116.16%, Go Digit at 108.6% with a 38.3% expense ratio, and Star Health at 99.6% with expenses at 30.1%. He explained that removing 18% GST but losing ITC does not always lower costs in the way people expect.
Hanut Mehta, CEO and Co-founder of BimaPay Finsure, also spoke about the rising cost. He said, “The absence of input tax credit will increase their operational cost. Over time, some of these costs may flow into base premiums, and as a financing partner, we’ll have to keep adapting to these shifts.”
Another expert, Jyoti Prakash of AlphaaMoney, agreed with this view. He said, “In short, the premiums may not decrease to the extent of the reduction in GST, as insurers factor in the adverse impact of non-allowance of duty inversion and ITC.”
