“GST” IMPACT ON THE INSURANCE INDUSTRY

Mr Jagendra Kumar is currently the Corporate Head (Training) at Shriram General Insurance Company. Mr Kumar is a prolific writer and has wide experience in the general insurance industry. Before joining SGI he was the CEO of Pearl Insurance brokers.

At the stroke of midnight on July 1, 2017, the most anticipated and a highly debated Goods and Services Tax (GST) was launched in India. The central tax reform witnessed a lot of fanfare and was also boycotted by certain stakeholders, especially within the political circle. However, businesses and end consumers were the most involved. From now on, all types of indirect taxes such as service tax, excise duty, sales tax along with other local and state taxes will merge into one single tax called GST. 

With the introduction of GST, taxation procedure is expected to be much simpler and easier to understand. GST is going to be a ground-breaking movement in Indian indirect tax structure. The existing tax mechanism between the state and the centre will go through a complete overhaul with the implementation of GST. 

Being a value-added tax, GST aims to do away with the cascading effect on goods and services cost. GST has paved the way for total refurbishment of existing tax architecture in India as it is going to impact incidence, structure and computation of indirect taxes. Currently, 15% service tax is levied on services which comprises 14% basic service tax, 0.5% Swachh Bharat and 0.5% Krishi Kalyan Cess. With the implementation of GST, consumers have to pay just one single tax. 

The GST Council is entitled to ascertain the rate of GST in various services and products. With the country ushering in a new tax regime with the introduction of the Goods and Services Tax (GST), consumers will now have to pay more for banking services, insurance premium payments and credit card bills beginning July 1. Most of the financial services will attract a higher tax of 18 per cent as against the previous 15 per cent under the new indirect tax
regime. 

The Indian insurance industry will face a temporary brunt as GST implementation will certainly impact insurers as well as individual policyholders. Typically, a policyholder pays a service tax on the risk element of the premium component while the investment element is usually out of the service tax scope.

Like all industries, the insurance sector is also swayed by the introduction of GST including insurers and policyholders. Life, health and motor insurance policies are now costlier as taxes have risen by 3 %. The consequence of GST on different types of insurance plans is more complex than a flat 3% hike on some particular types of insurance products. As far as the consumers are concerned, the increasing premium outgo is the most significant impact of GST on insurance. 

A middle class family that spends around Rs. 30,000 in car, health and term insurance will have to shell out around Rs. 1000 more every year from now on. Insurance companies in India will assess impacts of GST and in course of time if they find any positive impact that will reflect on the premium without changing the GST rate. Input tax credit is not available in the service tax structure designed for insurance business. 

Policyholders can’t avail input tax credit as these policies are devised for personal purposes. Even corporate policyholders who avail group health and life insurance for their employees don’t get input tax credit. In the newly introduced GST regime also insurance is exempted from the benefits of input tax credit. From the present rate of 15 percent, the GST on banking, insurance and investments such as real estate, mutual funds will see a hike of 3 percent as the GST will now be 18 percent on them. 

Apart from the premium hike, application of GST will bring some deeper and far-reaching implications in India’s insurance market. The implementation of GST is meant to de-clutter the current multi-layered federal, state and local indirect tax structure. GST is one of the biggest tax reforms since Independence and is expected to reshape India’s business landscape by making the country a lucrative destination to do business with and would work towards bringing down barriers between the states.

Why ‘GST’?

The Goods & Services Tax is a transformational structural reform which will have multiple benefits – the creation of a national market, enhanced ease of doing business; greater productivity & efficiency and improved tax compliance. All stakeholders have worked together for a seamless transition to this new paradigm. This reform will result in benefits for all participants in the Indian economy, including both businesses & consumers. The GST as a “Good and Simple Tax” that will be not only a tax reform but an economic and social reform as well that will unify the nation, “check corruption and end harassment at hands of officers. 

The primary beneficiaries of GST will be businesses (manufacturers, retailers, traders and more) for whom a uniform market across India would open up a window of opportunities. A uniform regulation across the country is expected to make compliance easier. It will also lead to cost savings, and the benefits will flow to end customers in the long run as far as reduced pricing is concerned. GST will unify at least 10 types of indirect taxes into one tax, to be collected at federal and state levels. 

Under the existing structure, at each point of sale, additional taxes are applied to the after-tax value of goods and services. The main purpose of GST is to eliminate this compounding effect by fixing a final tax rate where goods and services will fall under one of the four tax categories – 5 per cent, 12 per cent, 18 per cent and 28 per cent brackets.

What does GST mean on General Insurance?

In case of insurance premium, the insurance policies where the entire premium paid goes towards the risk cover such as in life insurance, or term insurance plans or general insurance policies for health or vehicle insurance, the GST of 18% will be on the entire premium. Under the GST regime in India, taxability on the gross premium for pure risk policies is contrary to the principle of taxing the “value addition”. GST is a tax on value addition and net premium after deduction of claim is the net value addition. It is very difficult to segregate the “savings” component and find a “value” that could be treated as the proper base for tax, particularly for every premium transaction during the life-cycle of an insurance policy. For general insurance products, the cost of purchasing policies will undoubtedly increase due to a 3 per cent rise in service tax from the current 15 per cent (including Krishi Kalyan Cess of 0.5 per cent and Swachh Bharat Cess of 0.5 per cent) to 18 per cent. 

With the introduction and implementation of GST, health and auto insurance policies will also become expensive as these will attract a tax of about 18 per cent on premiums. For instance, if a person was earlier paying a premium of Rs 10,000 with Rs 1,500 as service tax included in the premium, now he/she will have to pay a total of Rs 10,300 (including Rs 1,800 as service tax) for the same product with a net impact of Rs 300.

• Just like the life insurance sector, GST has impacted the general insurance sector as well. Car, health and travel insurance policyholders now have to pay 18% GST instead of the existing 15% service tax.
• GST rate will be 18% on fire insurance, marine insurance plans as well.
• Corporate policyholders, who availed general insurance policies, will have to pay GST on their policies. However, they get input tax credit on GST. Before the advent of GST, the input tax credit was available to them even under service tax.

Even though the tax hike post-GST is nominal, the increase in total outflow could be quite significant for many policyholders. For someone paying annual premiums for auto, household, healthcare, term plan and personal accident cover, say a total of Rs 50,000 a year, there could be a jump in the premium outflow by Rs 1,500 a year, with no additional risk coverage or benefits. The rise in premium may impact the demand for insurance products in the short run. However, as the increase is universal in nature and GST will bring benefits indirectly with a net improvement in disposable income, the net impact may get cushioned off in the future.

What does GST mean on Life Insurance?

For other life insurance products, as per GST rules, the value of services on which GST is to be imposed is calculated as the gross premium minus the amount allocated for investment. In case of single premium annuity policies, 10% of single premium is taxable. So, for a Rs 1 lakh premium, Rs 10,000 would be taxed at 18% now as opposed to 15% earlier. 

With the implementation of GST, life insurance policies will become dearer by 3 per cent. However, the amount of service tax will vary depending on the risk element embedded in the premium component and tax will be levied only on the risk portion of the premium and not on the saving portion. Therefore, the immediate impact of GST would be higher in term insurance and endowments plans.

• With GST coming into effect, premium of life insurance plans will be in the range of .3% to 3%.
• The tax rates for Term and unit-linked plans’ tax rate will see a 3% rise and will go to 18% from existing 15%. The first-year premium of annuity products will also rise to 4.5% from 3.75%.
• Renewal premium of annuity products will rise to 2.25% from 1.88% and single premium of annuity products will be revised to 1.80% from 1.50%.
• GST is charged on interest applicable on premium received after a delay. The rate will depend on the premium type.
• Policyholders who need to pay alteration fee or fees for preparation of duplicate policy also have to pay these charges with GST.

Increasing cost may adversely affect the life insurance sector adversely. GST will discourage common people from availing life insurance covers for themselves and their family members. Moreover, input tax credit is not allowed for health and life insurance although the government makes it obligatory for employers to provide it to its employees. The GST rate is slightly higher than the existing service tax rate. Therefore, it would result in a small increase in the insurance premium. A product-wise impact on life insurance is as below:

Exempted Insurance Schemes:

Life insurance provided by Government schemes are excused from GST. Here is a list of schemes in which GST is not applicable.

• Janashree Bima Yojana (JBY)
•  Varishtha Pension BimaYojana
• Aam Aadmi Bima Yojana (AABY)
• Pradhan Mantri Jan Dhan Yojana
• Pradhan Mantri Vaya Vandan Yojana
• Pradhan Mantri Jeevan Jyoti BimaYojana
• Life insurance provided by the Central Government to members of the Army, Navy and Air Force.
• Life micro-insurance product with maximum cover of Rs. 50,000 approved by the Insurance Regulatory and Development Authority
• Any other State Government insurance scheme notified by Government of India on the recommendation of GSTC.

The Impact on Insurance:

In the Asia-Pacific, where some countries account for the world’s highest insurance penetration, GST and value-added tax (VAT) are not levied on insurance products. Exceptions would be some cases in China, where policies of less than one year attract a 6% tax and Taiwan and the Philippines, where tax of 2-5% is charged outside the GST framework. Even in the West, countries like Canada, and the European Union, do not tax life insurance. This tells us that these governments understand the need for insurance protection and encourage it by supportive policy.

Buying insurance will continue, provided insurance companies have the right kind of solution-based selling approach and to that extent, a favourable indirect taxation structure would have helped. Insurance companies in India have strived hard to create financial awareness and increase insurance penetration in the country. 

As the country strides into a new economic phase, the industry gets the attention and support that it rightfully deserves. Governments across the world, even in the more mature markets, are known to make conditions favourable for insurance protection. In many countries, life insurance is outside the purview of GST. 

In a few, cash flow systems are followed for general insurance e.g. in countries like Australia, Singapore, and South Africa. For the latter, tax is charged on the premiums received and credit is allowed for claims that are paid. Now all places of business in each state would have to be registered with a 15 digit Goods and Services Taxpayer Identification Number. The concept of centralized registration as existing under Service Tax has been done away with.