With the implementation of the GST, prices of goods and services are ready to get revised higher or lower depending on whether the new tax rate is greater or lower than the previous tax system. It may take some time to know the GST impact on the price of goods because several layers of taxes have been subsumed, but in the case of services, it is now clear that the price is set to increase with the applicability of GST.
One place that this increase cuts close is in case of insurance premiums. Insurance is one of the important risk mitigation tools under financial planning. It may include life and non-life policies while allowing the cover for health, life, vehicle etc. So, a big increase in costs here can have a severe impact. Let us look at how much GST changes the picture when it comes to insurance.
GST on insurance premium
In the previous tax system, insurance premium was taxed at the rate of 15%, but now under the GST the rate has been increased to 18%. With additional 3% tax burden, the price of all insurance policies will increase to that extent.
Under life insurance endowment, the GST would take into account only the premium portion that is used for covering the risk and the associated charges, and no GST would be applicable on the investment part. GST would be applicable at 18% on 25% of the first-year premium, i.e., 4.5% on the premium rate and thereafter at 18% on 12.5% of subsequent renewal premium, i.e., 2.25% on the premium rate for the remaining period.
Similarly, the term policy would be taxed at 18% on the complete premium amount as it contains only the portion of premium for risk coverage, while for ULIPs, the charges such as fund management charges etc. would be taxable.
On one time annuity policy, now the tax would be charged on 10% of the single premium at 18% GST rate, i.e., the effective rate on the total premium would be 1.8%.
On non-life insurance products, the tax rate has increased straight forward by 3%, i.e., from 15% (earlier) to 18% (Now). Health insurance, motor vehicle insurance both would come into the ambit of 18% GST rate. Suppose, if your non-life insurance premium before GST was Rs.23000, then now it would cost you Rs.23600.
The government insurance schemes such as Pradhan Mantri Jeevan Jyoti Bima Yojana, AamAadmiBimaYojana, Varishtha Pension BimaYojana etc. are kept out of GST ambit.
Finally
The overall impact of GST on the insurance sector would be restricted to the additional 3% tax burden. Initially the insurance companies will feel the heat due to strict compliance norms and more returns per year in comparison to the previous tax system and it may add to their cost, but gradually the things will settle down.
Insurance companies have already started informing their customers through various communication methods such as SMS, email, etc., about the increase in applicable tax to 18%. Insurance customers should continue with their existing plan as the price hike due to the GST is equally applicable on all the insurance companies and there is no way you can avoid this additional 3% tax.
