Kolkata: Months before the GST rejig was announced by Prime Minister Narendra Modi on August 15 from the ramparts of the Red Fort, the clamour for abolition of GST on the premiums of life and health insurance premiums was rising across the country and the GST Council was seized of the matter. Predictably, when the GST reliefs were announced, prominent among the reliefs was removing the tax burden from the premiums.
Needless to say, this will offer a degree of cost reduction to the customers and could boost the adoption of insurance to an extent. Let’s have a look at the relief this will provide to the customers. One has to pay 18% GST on the premiums of insurance policies right now. In simpler words, if one has a premium of Rs 100 to pay, the total amount he/she has to pay is Rs 118. In future, customers of all term insurance plans, individual ULIP plans and family floater plans will not carry any tax at all.
Significance of input tax credit withdrawal
But it is not that straightforward. There is the concept of input tax credit, which has been removed too, making the picture a bit complex for the insurance companies. Removal of the input tax credit can squeeze the margins of insurance business. Input tax credit allows insurance companies to slash their payable taxes by claiming credit for GST which they pay on different purchases.
While companies get 18% GST now, they can also claim tax credit which they pay to a diverse array of cost centres such as marketing expense, rental for office space, commissions to agent network. Right now, the insurance companies can lessen their GST burden against the amount of tax they get from policyholders via the premiums. They pay the government the difference.
For example, if the insurance company receives Rs 100 as premium, they can keep Rs 40 as rent and Rs 30 as commission to agent. The GST on these expenditure is 18%. Therefore, the insurance company pays 18% of Rs 70, or Rs 12.60 as tax. But it has collected Rs 18 from the policyholder and, therefore, are liable to pay only Rs 18 minus Rs 12.60 or Rs 5.40 to the government as GST.
Input tax credit to vary from company to company
From September 22, insurance companies will not collect GST on premiums. They will also get no input tax credit. Can insurance companies pass the lost input tax credit to customers? Analysts think that this is not impossible. But since the cost structures of different insurance companies are different, the impact will vary from insurer to insurer.
There remains a possibility that insurance companies pass on the Rs 12.60 element which they cannot claim any longer, to the customers who would be paying a premium of Rs 112.60 instead of the Rs 188 payable till September 22. Therefore, if the lost tax credit is passed on to the consumer, the premium will certainly decline but not to the extent that might seem at first — abolition of Rs 18 on every Rs 100. Now the input tax credit claimed by each company is different and it is just an indicative calculation.
Reports indicate that this extra element of cost could come to around 3.31% of the premium, according to former executive director of LIC, Ashwin Ghai. It indicates a much lower element than the Rs 12.60 layer that a back-of-the-envelope calculation indicates. “The zero-GST and no-ITC (input tax credit) option results in the lowest overall cost, reducing the financial burden and even outperforming the 5% GST option. This approach not only provides the greatest economic advantage to consumers but also aligns with the fundamental principle that essential social security measures should remain tax-free. By making insurance more affordable, a zero-GST policy could enhance financial inclusion and promote greater access to critical protection for all citizens,” Ghai has been quoted as saying.