The Debate on GST and Life Insurance Premiums
Recent demands to exempt life insurance premiums, including term insurance, from the 18% Goods and Services Tax (GST) have sparked debate. While many believe this exemption will significantly reduce premiums and make insurance more affordable, life insurance companies argue that a full GST exemption may have the opposite effect.
Current Scenario: GST on Life Insurance
Under the current tax regime, policyholders pay an 18% GST on their life insurance premiums. For example, if the base premium is ₹100, policyholders pay ₹118 after adding GST.
Additionally, insurers can claim Input Tax Credit (ITC) for the GST paid on goods and services required to provide insurance services, such as salaries, office expenses, and marketing. This ITC helps reduce the tax burden on insurers, which can then be passed on to customers in the form of lower premiums.
The Role of ITC in Lowering Costs
Let’s break it down:
1. From the total premium collected, life insurers allocate portions to various operational costs like office rent, agent commissions, and marketing expenses.
2. GST is applicable to these costs, and insurers claim ITC for the GST paid, reducing their overall liability.
3. Without GST, life insurers lose the ability to claim ITC, increasing their operational costs.
For instance, if an insurer collects ₹100 in premiums and incurs ₹9 as GST on services like rent and commissions, the ₹9 can be offset under ITC. Without GST, this ₹9 becomes an added cost, which insurers would pass on to policyholders, potentially making premiums more expensive.
What Happens Without GST?
If GST is removed, life insurance companies will lose ITC benefits, which could increase costs for policyholders. Instead of reducing premiums from ₹118 to ₹100, insurers may charge ₹109 to cover the lost ITC margins, resulting in marginal savings or even higher costs.
Industry Insights: The Need for Rationalization, Not Exemption
Life insurance companies are advocating for a reduction in GST rates rather than a complete exemption. According to industry experts:
- The current 18% GST rate allows insurers to claim ITC for about 11% of premium collections.
- Reducing GST to 12% would enable insurers to retain ITC benefits while offering lower premiums to customers.
“Life insurance is largely a commission-based business, with a significant portion of expenses going towards agent commissions, advertising, and marketing. GST on these services adds up as a major cost. A 12% GST rate strikes a balance, benefiting both insurers and policyholders,” said Bimal Jain, a Delhi-based GST expert.
Challenges of a GST-Free Regime
- Higher Operational Costs for Insurers: The absence of ITC would compel insurers to pass increased costs onto policyholders.
- Sustainability Concerns: Exemption may lead to financial strain on insurers, especially those operating with tight margins.
- Complex Renewals: For policies sold in earlier years, GST exemptions on renewals would complicate taxation and create inconsistencies.
The Impact on Policyholders
A rationalized GST rate (e.g., 12%) could achieve the twin goals of reducing premiums and maintaining ITC benefits for insurers. In this case, premiums would drop to ₹112 instead of the current ₹118, offering savings for policyholders without burdening insurers.
Expert Opinions
- MS Mani, Partner at Deloitte India, explained:
“Complete exemption from GST means insurers can’t claim ITC on services used to provide insurance. This increases their cost base, which is eventually passed on to customers.” - Vivek Jalan, Partner at Tax Connect Advisory Services, added:
“The eligibility for ITC depends on whether services are taxable. Exemption removes this eligibility, converting costs into expenses, which results in higher premiums for consumers.”
The Path Forward
Life insurers recommend a GST rationalization policy instead of full exemption. They argue that lowering GST to 12% will:
- Maintain ITC benefits for insurers.
- Reduce premiums for policyholders.
- Ensure sustainability for the life insurance industry.
Conclusion
While a GST exemption on life insurance premiums appears beneficial at first glance, it may inadvertently increase premiums due to the loss of ITC benefits for insurers. A more balanced approach, such as reducing GST rates to 12%, could ensure affordability for policyholders while supporting the financial health of insurance providers.
