GST Exemption on Insurance: A Boon for Consumers, But a Bane for Insurers?

The group of Ministers on GST has recommended a full exemption of Goods and Service Tax on individual life and health insurance policies. This move, announced by GoM Convenor and Bihar Deputy Chief Minister Samrat Choudhary, aims to improve affordability and expand coverage.

Scope of Exemption Remains Unclear

However, Emkay noted that the scope of the exemption remains unclear. The brokerage firm stated that it is still unclear whether the entire Individual Life Insurance basket, including savings and annuity, or just the Retail Term Life, will be exempted from GST. Additionally, there is ambiguity around whether group platform products like credit life and banca health insurance, paid by individual customers, will benefit from the exemption.

Loss of Input Tax Credit

One of the biggest implications of the exemption is the loss of Input Tax Credit (ITC). With the GST exemption, the ITC benefit is likely to go away for the products falling under the ‘Exempt’ category. This means that insurers will no longer be able to claim input tax credit on commissions and other services.

For example, if an insurer currently collects Rs 100 premium and Rs 18 GST from the customer and is incurring Rs 35 as expense on commissions and other services, and has hence paid Rs 6.3 (18% on Rs 35) as GST, then the insurer will deduct this Rs 6.3 from the collected GST and deposit the balance Rs 11.7 with the government.

With the premium now falling under the ‘exempt’ category, the insurer will increase the base price to Rs 106.3 to cover for the ITC loss. This could lead to insurers adjusting their base premiums to offset the loss.

Benefits for End-Consumers

Despite the potential increase in base premiums, the end-consumer is expected to benefit from the GST exemption. Emkay noted that the price for end-consumers will certainly go down, although the exact amount of reduction is still unclear.

The brokerage firm stated that the entire noise around the GST cut on insurance has been aimed at bringing down prices to improve affordability, especially in the post-Covid era when the central and state governments, along with the political class, realized the importance of insurance protection and the extent of under-insurance in society.

Government Monitoring

The government is expected to closely monitor that insurers pass on the benefits to customers rather than absorbing them into margins. This will ensure that the intended benefits of the GST exemption reach the end-consumers.

Focus on Cost Control

The removal of ITC will also shift the focus to cost control, particularly around commissions and non-salary operational expenses. Insurers will need to optimize their costs to maintain profitability in the face of reduced revenue from GST.

Conclusion

In conclusion, the GST exemption on individual life and health insurance policies is a welcome move for consumers, but it may raise input costs for insurers. As the industry adapts to this change, it will be important to monitor the impact on premiums, affordability, and the overall insurance market in India.

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