The government had proposed completely exempting life and health insurance premium from Goods and Services Tax (GST), Bihar Deputy Chief Minister and convenor of insurance GoM Samrat Choudhary had said earlier.
Health and term insurance premiums may become cheaper if the GST Council approves rate cuts at its meeting, which began in New Deli on Wednesday. However, according to a report by HSBC Securities and Capital Markets (India), insurance companies are likely to face short-term pressure on profitability due to slower repricing of existing policies
NEW DELHI: The 56th meeting of the GST Council, chaired by Finance Minister Nirmala Sitharaman and comprising state ministers, on Wednesday started deliberations on ‘next-gen GST’ reforms, which will lower tax rates on items of mass consumption, remove duty inversion in sectors, like textiles, and ease compliance burden for MSMEs.
The Council, over the next two days, will discuss reducing the number of slabs in GST to just two — 5 per cent and 18 per cent — and removing the 12 per cent and 28 per cent slabs. Also, a special 40 per cent tax has been proposed on a select few items, including tobacco and ultra-luxury goods.
The government had proposed completely exempting life and health insurance premium from Goods and Services Tax (GST), Bihar Deputy Chief Minister and convenor of insurance GoM Samrat Choudhary had said earlier.
Currently, health and life insurance premium attracts 18 per cent GST.
Health and term insurance premiums may become cheaper if the Goods and Services Tax (GST) Council approves rate cuts at its meeting, which began here on Wednesday.
However, according to a report by HSBC Securities and Capital Markets (India), insurance companies are likely to face short-term pressure on profitability due to slower repricing of existing policies.
The two-day meeting of the GST Council began here on Wednesday and it is expected to consider multiple scenarios for GST reductions.
Various proposals which have been referred to the council include complete exemption without input tax credit (ITC), a 5 per cent slab with or without ITC, or a 12 per cent rate with ITC.
HSBC’s analysis suggests that a full exemption could reduce health insurance premiums by around 15 per cent. Even a moderate 6 per cent rate cut under the 12 per cent GST with ITC scenario could ease costs for policyholders.
However, the government may face a revenue shortfall of USD 1.2-1.4 billion annually from GST on premiums if exemptions are granted, noted the report.
While lower premiums are expected to boost demand, insurance companies could see a 3-6 per cent impact on combined ratios (CR) in the retail health segment, primarily due to slower repricing of renewals which may take 12-18 months.
The expense ratios of insurers will also play an important role in determining transmission depending if ITC is available or not.
“Standalone health insurers would see a relatively higher impact than multi-line insurers, largely on high exposure to retail health,” noted the report, though growth prospects improve in the long run.
“We think a large part of the impact would be transitionary due to slower back book repricing,” the report added.
The report concludes that GST cuts, if implemented, could bring long-term gains for both insurers and consumers, despite short-term margin pressures. Improved affordability may encourage more households to purchase health cover, supporting broader financial inclusion goals.
The GoM on life and health insurance will submit its report to the GST Council. The report will also include views and concerns expressed by some state finance ministers, he said.
“The Centre’s proposal is clear that the insurance sector’s individual and family (policies) should be exempt from GST. This has been discussed and the GoM report will be presented to the Council,” Choudhary told reporters here after the meeting of the GoM.
Almost all states were in favour of the proposal, but they asked the GST Council to device a mechanism by which the GST rate cut benefits are passed on to the customer, said Telangana Deputy Chief Minister Mallu Bhatti Vikramarka, a member of the GoM.
“We made it clear that the GST reduction benefit should go to policyholders and not companies, some mechanism has to be developed.”
“States wanted it (tax rate) to be brought down or exempt. At the same time many states told the (GoM) meeting that some mechanism must be developed so that rate cut benefit reaches the people. The GST Council will decide a mechanism,” Vikramarka said.
About Rs 9,700 crore annual revenue loss is estimated on account of GST exemption to individual insurance policies, he said.
As per the sweeping rate change proposal put forth by the Centre and vetted by a group of state finance ministers, as many as 99 per cent of items in the 12 per cent category, such as butter, fruit juices and dry fruits, would move to a 5 per cent tax rate.
Similarly, electronic items like ACs, TVs, fridges, and washing machines, as well as other goods like cement, will be among the 90 per cent of the items that will move from 28 per cent to a lower 18 per cent slab.
While opposition-ruled states have demanded that all states be compensated for the revenue loss they incur post the implementation of the GST rejig, Andhra Pradesh Finance Minister Payyavula Keshav said his state is supporting the Centre’s GST rate proposals.
“As an alliance partner, we are supporting the Centre’s proposal of GST rate rationalisation. It is in favour of the common man,” Keshav told reporters before the Council meeting. Andhra Pradesh’s Telugu Desam Party (TDP) is an ally of the BJP-led NDA government at the Centre.
Prime Minister Narendra Modi, in his Independence Day speech on August 15, unveiled the plan for GST reforms. Shortly thereafter, the central government shared a blueprint of the planned reform with a Group of Ministers (GoM) from different states for initial vetting.
As many as eight sectors — textiles, fertiliser, renewable energy, automotive, handicrafts, agriculture, health and insurance — will benefit the most from the rate overhaul, as per the Centre’s blueprint for GST reforms.
On Wednesday morning, before the Council meeting, eight opposition-ruled states — Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal — had their own meeting to formalise their strategy and reaffirmed their demand for revenue protection to give approval to the rate rejig.
Jharkhand Finance Minister Radha Krishna Kishore told reporters here that his state will suffer a Rs 2,000 crore revenue loss if the Centre’s GST rate reform proposal is implemented.
“If the Centre agrees to compensate us for whatever loss we would incur, then we have no issues in approving the agenda before the Council. I don’t think the issue will come up for voting, as in a federal structure, it is the responsibility of the Centre to compensate states for revenue loss,” Kishore told reporters here after the meeting of the opposition bloc.
Under the present GST structure, the 18 per cent slab accounts for a lion’s share or 65 per cent in GST collection. The 5 per cent slab contributes 7 per cent to the total GST kitty.
The top tax bracket of 28 per cent on luxury and sin goods contributes 11 per cent of the revenue, while the 12 per cent slab accounts for just 5 per cent of the revenue.
The Centre’s GST reform proposal put forth before the Council rests on three pillars — structural reforms, rate rationalisation and ease of living.
The structural reforms would ensure stability and predictability by providing “long-term clarity on rates and policy direction to build industry confidence and support better business planning”.
On the ‘ease of living’ side, the finance ministry’s proposal includes seamless, technology-driven GST registration, especially for small businesses and startups. It also suggested the implementation of pre-filled GST returns and faster, automated processing of refunds for exporters and those with an inverted duty structure.
“The next generation GST reforms… will set an economy absolutely open and transparent in the coming months and with further reduction in compliance burden, (reforms) will be making it easier for small businesses to thrive,” Sitharaman had said on Tuesday at the Foundation Day celebrations of Tamil Nadu-based City Union Bank.