The Group of Ministers (GoM) on Wednesday has proposed to completely exempt premiums paid towards health and life insurance policies from the GST to GST council. This step aims to make insurance more affordable and accessible to millions of Indians. The policy aims to strengthen “insurance for all by 2047”.
Currently, health and life insurance premium attracts 18 per cent GST. It is being assumed that the tax on insurance premiums could be made zero or 5%.
But there is a catch-
Insurance premiums can become more expensive, as the insurers also has additional costs such as , agent commissions, office expenses and sales and and marketing expenses. Since they pay GST on these activities too, the government allows them to claim input tax credits against the GST collected from policyholders, which helps reduce their overall tax burden.
So, say you pay Rs 1000 as a premium for the purchase of a life insurance policy, on which 18% (Rs 180) is charged as GST. Assume that out of this Rs 1000, your insurer pays Rs 200 for office rent and Rs 600 to pay commission to agents. Remember that GST is being paid at the rate of 18% on both of these.
Hence, the total GST paid by your insurer comes to Rs 144, i.e. Rs 36 for rent and Rs 108 for agent commission. The insurer sets this off against the GST it has collected from policyholders (Rs 18), bringing its total GST liability to Rs 36.
However, in case both health and life insurance premiums payments are classified as zero rated, or nil, the post tax insurance premium for consumers would come down, since ITC credits would still be available to insurers.
Hemik Shah, Co Founder Qian Insurance says-
“To determine if reduction in GST rate will help policyholders, we will have to first determine whether health and life insurance services are going to be considered as Nil Rated or will they be considered as exempt from GST. The answer to this will determine the eligibility of input tax credit. In case the services are considered as exempt, then input tax credit will not be available and therefore, the savings on account of GST rate reduction will be negated by the hike in premiums due to unavailability of credit"
However, he further adds that if the health and life insurance services are classified as Zero Rated or Nil Rated, then credit will be available and can be used to set off GST liability of other lines of business. “In the absence of ITC, it seems unlikely that insurance companies will be able to pass on the benefits. This is because unavailability of credit will make the GST on goods purchased and services availed a cost for the insurance companies, which in turn may lead to hike in premiums to maintain profitability and solvency for the insurers”, he says.