Insurance industry hopes that key input services of commission and reinsurance also receive an exempt status so that there is no blockage of input tax credit ,” Mahesh Jaising Deloitte India Partner and Leader
it is essential to tackle some of the structural issues like the inverted duty structure that still affects industry efficiency and margins, Jude Gomes, MD & CEO Ageas Federal Life Insurance
New Delhi: The proposed GST exemption on individual health and life insurance policies is likely to be most beneficial for term and health insurance policies, tax experts said on Thursday.
Key input services like commission and reinsurance should also receive an exempt status so that there is no blockage of input tax credit (ITC), they added.
The Centre has proposed that GST on individual health and life insurance policies be brought down from the current 18 per cent to nil. A group of state finance ministers has recommended the same to the GST Council and suggested that the council devise a mechanism to ensure that the tax cut benefit reaches the policyholders.
A final decision on the GST rate on insurance is likely to be taken by the GST Council next month.
Deloitte India Partner and Leader Mahesh Jaising said, “We need to watch out for the fact that an exemption results in credit blockages, which could impact cost.
“Insurance industry hopes that key input services of commission and reinsurance also receive an exempt status,” Jaisingh said.
EY India Tax Partner Saurabh Agarwal said making insurance exempt from GST would not lead to a full 18 per cent price cut. This is because insurance companies won’t be able to claim back the GST they pay on their own expenses, like commissions, office rent, software, etc. This input tax will now become a cost for them.
“The final price reduction for consumers will only be the net amount after accounting for this new input tax cost. If the tax had been ‘zero-rated’ instead of ‘exempt’, companies could have claimed a refund for the GST paid on their inputs, and consumers would have seen a full reduction of the tax from their premiums,” Agarwal said.
Explaining the implications of exempt status on insurance, Dhruva Advisors Partner Jignesh Ghelani said the effectiveness of this rate change will depend upon the implementation design, including the ability to avail input tax credit (ITC) by the companies.
There are several types of insurance policies, such as pure term and health insurance, Unit Linked Insurance Plans (ULIPS) and traditional life insurance policies, such as endowment /money back.
Premium collected under various insurance policies is allocated towards ‘coverage of risk’ and, in many cases, a portion of the premium is allocated towards ‘investment’ to generate returns.
Typically, in the case of term & health insurance, there is no investment portion and therefore, premiums are generally low. Whereas in the case of traditional life insurance policies, about 30-40 per cent of the premium is invested in the early years and more later.
For ULIPS, 80-95 per cent of the premium is invested, depending on charges and policy year.
While GST is applicable at 18 per cent on health and life insurance premiums, there are specific valuation rules which determine the value of taxable supply on which 18 per cent is to be made applicable.
“On a broad basis, the value of taxable supply specifically excludes the portion of premium allocated for investment/savings. The intent is to tax the premium, which is attributable to ‘risk’ coverage. Therefore, it is clear that the direct impact of the exemption may not necessarily bring a reduction of the premium by 18 per cent for all the types of insurance policies,” Ghelani said.
Where GST exemption is allowed, the companies will not be able to get ITC on GST paid on their purchase of goods and services, thereby increasing the cost of providing insurance services.
“To this extent, savings on account of reduction in GST rates will be negated in the case where the companies do not absorb the increase in the cost. Given the above dynamics, it is estimated that the overall impact of the exemption of the GST rate is likely to be high on term and health insurance policies, making it more affordable to the masses. Whereas the impact of exemption on traditional life insurance or ULIPS is likely to be very low, especially on account of an increase in the tax cost of providing such services,” Ghelani added.
Jude Gomes, MD & CEO Ageas Federal Life Insurance, commented , “By abolishing the GST, the government has made a customer-centric move that will induce more families, particularly from middle-class and underprivileged sections, to get themselves covered with the proper insurance. Affordability is a major driver, but we also think it is essential that we tackle some of the structural issues like the inverted duty structure that still affects industry efficiency and margins. ”
“ By easing the cost burden, it will encourage millions more to secure themselves and their families with adequate insurance coverage, said ”Sarbvir Singh, Joint Group CEO, PB Fintech.
-Sarbvir Singh, Joint Group CEO, PB Fintech