How does GST Impact Your Insurance Premium?

"Nothing is forever except change," said Lord Buddha, hinting at the ever-constant process called change. Something of this sort happened on 1st July 2017, as India stepped into a single taxation system eradicating several different state tax* laws, called the GST - Goods and Services Tax^@. 

Let’s discuss in detail the meaning of GST^@ and the implications of GST^@ on insurance premiums.

What is GST (Goods and Services Tax)@?

GST^@ is an indirect tax that replaced all the other indirect taxes prevailing in India. It is multistage, destination-based taxation that calculates tax at every point of value addition. It is a comprehensive one nation one tax system. It is levied on the supply of goods and services post-implementation it became a single domestic indirect tax law for India.

Under the GST^@ taxation system, the tax is levied at every point of sales. In the case of intrastate sale of goods - two taxes are applied accordingly, namely State GST^@ and Central GST^@.

GST^@ became the most significant tax reform in India post-independence wherein all the prevailing indirect taxes such as Service Tax and Value Added Tax (VAT) thereby merged into a single taxation system. The parliament passed the GST^@ Bill on 8th August 2016.

 

How does GST@ Affect the Insurance Sector?

Previously, the insurance sector was levied with a stand-alone tax called service tax. This rate is around 15%, comprising 14% basic service tax, 0.5% Swachh Bharath cess, 0.5% Krishi Kalyan cess. As GST^@ got implemented in the country, the service tax was subsumed into GST^@. 

The GST^@ council decides the tax rates depending on the major four slab rates of 5%, 12%, 18%, and 28%. Unfortunately, GST^@ for services is fixed at 18%. Since the Insurance sector comes under the services sector, the new GST^@ is charged on any services offered in the insurance sector.

Hence, the insurance GST^@ rate is 18% starting from 1st July 2017 instead of 15 %, which was charged earlier. This 3% increase in the tax rate affected the premiums of the Insurance policies, thereby increasing the price of the premiums. The effect of GST^@ on the premium can be seen differently in specific policies. Let us have a look at how GST^@ affects the premium of policies separately.

Effect of GST@ on Life Insurance Policy Premiums 

Since we know that GST^@ is the tax levied on providing services under the life insurance sector, Calculating GST^@ is done as per below.

 

• For life insurance policies with investment benefits, GST^@ is levied on the gross premium deducted with the allocated money for investment for the policyholder. For example, in ULIP policies, GST^@ is calculated only on premium minus the amount allocated for investment purposes.

• For single premium policies with annuity options, it is calculated as 10% of the premium the policyholder is paying. 

GST@ on Term Insurance

In term insurance, since the premium paid by the policyholder culminates in protecting the insured's life, GST^@ is calculated on the total premium in the case of term plans.

GST@ on Endowment Plans

GST is calculated on 25% of the premium on the first year and 12.5% of the premium from the second year and subsequent years thereon in endowment plans. For example, if an endowment plan has a premium of Rs. 1,00,000 - for the first year, GST^@ of 18% is calculated on 25% of the premium, i.e., Rs. 25,000 and on Rs. 12,500 in the subsequent years starting from the second year. 

Effect of GST@ on General Insurance plans

In the case of general insurance plans such as health insurance, automobile insurance, travel insurance, fire insurance, marine insurance, GST^@ is calculated as 18% of the premium paid - which is 3% higher than the previous service tax calculated at 15%. Hence, the premium for these policies has seen a 3% hike. 

Effect of GST@ on the Insurance Sector

With the effect of a 3% increase in premiums of most insurance products, there is fierce competition between the market players of the insurance sector. Since the insurance sector is a price-sensitive market for charging premiums, the companies try their best to reduce their operating expenses to keep premiums low. 

Since GST^@ is constant across all policies, the companies have ramped up their customer service experience to become the preferred insurance provider for customers; for instance, Tata AIA premium payment provides a flexible pay-out option of monthly, annual, quarterly premium payments as per the convenience of the customers. Often the premium charged by the company is taken as the indicator for comparing plans. Still, customers would seriously stumble if it isn't considered as one of the several factors to evaluate insurance policies.

The primary objective of insurance is to secure oneself by insurance and get a claim in case of any mishap. Customers should eventually look for the claim settlement ratio, and the GST^@ on insurance claims received, which are apt parameters for evaluating the reliability of insurance providers. Also, for the benefits, coverage options should be seen as the assessment parameter rather than only sticking to look at the price of premiums charged by the companies.

 

Policies Exempt Under GST@

Life insurance policies which the Indian government provides are exempted from GST^@, for example, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Jan Dhan Yojana, Pradhan Mantri Vaya Vandan Yojana, Janashree Bima Yojana (JBY), Aam Aadmi Bima Yojana (AABY), etc. 

What are Input Tax Credits in GST@ and GST@Exempt Policies? 

 

Input tax credits refer to the time of tax-paying on output -one can claim relief to the amount that has already been paid tax in input. This facility applies only to very few cases in insurance buying scenarios.

This facility is not available to life and health insurance premiums as they are only for personal use. The corporate policyholder's life and health insurance policies are also not eligible for any input tax credit; the only premium paid for general insurance policies of group companies is eligible for an input tax credit under the GST^@ regime. 

Conclusion

Implementation of GST^@ undoubtedly increases the premiums of several insurance policies one might have already taken or intend to take shortly. What's more important is to take the time out to access and evaluate the features of policies that one has chosen. Consider the benefits they are providing concerning other policies offered in the market, and even if it results in a slightly higher premium, choose a plan that provides comprehensive coverage. Smart decisions concerning the selection of policies may save thousands of rupees in the event of any future claim. 

 

L&C/Advt/2021/Oct/1869