The GST Council will soon provide clarity on input tax credit for life insurers, following a recent Rs 290-crore demand on Life Insurance Corporation — a move that is expected to come as a relief for LIC.
The complication on GST arises in case of traditional life policies or endowment plans, where GST is levied on only a portion of the plan. As a result, on the first-year premiums, GST is levied at 4.5%, while for subsequent years, it is levied at 2.25%.
That is because these policies have two components — an insurance component, which attracts GST, and a savings component, which is treated akin to deposits or investment in banks.
The issue relates to the input tax credit claimed on the portion of premium that is exempted from payment of GST. Since the premium itself is exempt, tax authorities believe, the law does not allow companies to claim input tax credit.
