Impact of GST on Life Insurance in India

Key takeaways

• GST is a destination-based tax that levies charges at the point of consumption of goods or services.
• For insurers, compliance with GST regulations is crucial.
• Insurance companies are required to collect and remit the 18% GST on premiums to the government.
• Under the GST regime, the tax paid on the premiums of term insurance policies is eligible for the input tax credit.

The introduction of GST has brought about several changes and implications for the life insurance sector in India, ranging from changes in premium rates, operational processes, compliance requirements, and customer behavior. The impact of GST on life insurance has been both positive and challenging, with insurers and policyholders adapting to the new tax regime.

In this article, we will delve into the key aspects of the impact of GST on life insurance in India. We will explore how GST has affected various segments of the life insurance industry, including policy premiums, product offerings, distribution channels, and claim settlements. We will also analyze the challenges faced by insurers in complying with the complex GST regulations and the strategies adopted to overcome them.

What is GST?

Goods and Service Tax (GST) is an indirect tax applicable to the supply of goods and services, which came into effect on July 1, 2017, replacing a set of indirect taxes. It is a destination-based tax that levies charges at the point of consumption of the goods or services, succeeding the origin-based tax.

How Does GST Work in Insurance?

The implementation of GST has had a significant impact on insurance products and services. One of the key changes is the increase in the cost of insurance premiums due to the additional GST component.

• Insurers are required to charge GST on the premium amount, and policyholders are required to pay the total premium amount inclusive of the GST. Moreover, insurers are also required to comply with the GST regulations and file regular GST returns.
• This entails maintaining proper records of all the insurance transactions, including the policyholders’ details, premiums collected, and GST charged, and submitting the same to the tax authorities within the stipulated time frame. Failure to comply with the GST regulations can result in penalties and fines for insurers.
• They should also ensure that the insurers they deal with are registered under the GST regime and comply with the GST regulations to avoid any future complications.

Key Considerations for Insurers and Policyholders

• For insurers, compliance with GST regulations is crucial. They need to ensure that they are registered under the GST regime, charge the appropriate GST rate on the premiums, and file regular GST returns.
• Insurers also need to educate their policyholders about the impact of GST on insurance premiums and provide transparent information about the total premium payable inclusive of the GST component.
• Insurers should also review their insurance products and services to determine the GST implications and update their pricing and documentation accordingly.
• This may involve revising the policy wordings, endorsements, and other related documents to reflect the correct GST rates and comply with the GST regulations.
• Policyholders should be aware of the GST implications on their insurance premiums and make sure they understand the total premium payable inclusive of the GST component.
• They should also check the insurers’ GST registration status and compliance with the GST regulations to ensure they are dealing with reputable and compliant insurers.

Impact of GST on Life Insurance Premium

The supply of goods and services is subject to the comprehensive indirect tax known as GST. It replaced various indirect taxes such as central excise duty, service tax, and value-added tax (VAT).

GST has a multi-tiered structure, with different tax rates applied to different goods and services. In the case of life insurance, GST is levied on the premium amount paid by the policyholders.

GST on Life Insurance Premiums

Under GST, life insurance premiums are subject to an 18% tax rate. This means that policyholders are required to pay an additional 18% on top of their premium amount as GST. This has resulted in an increase in the overall cost of life insurance for policyholders.

Impact on Policyholders

The impact of GST on life insurance premiums has been felt by policyholders in various ways.

• As mentioned above, one of the most significant effects is the increase in the cost of insurance premiums.
• With the 18% GST levied on premiums, policyholders have to pay more for the same coverage, which can impact their financial planning and budgeting.
• Additionally, some policyholders may find it challenging to afford life insurance premiums due to the increased cost. This may lead to a decrease in the number of people purchasing life insurance policies, which could potentially leave them and their families financially vulnerable in case of unforeseen events.

Impact on Insurance Companies

The introduction of GST has also affected insurance companies in India. Insurance companies are required to collect and remit the 18% GST on premiums to the government.

• This has increased the administrative burden on insurance companies, as they need to ensure compliance with GST regulations, maintain accurate records, and file regular GST returns.
• Furthermore, insurance companies may also face challenges in marketing and selling life insurance policies due to the increased cost of premiums.
• The higher cost may deter potential policyholders from purchasing insurance policies, resulting in reduced sales and revenue for insurance companies.

Impact of GST on Term Insurance

One of the key areas where GST has impacted term insurance is in the calculation of premiums. Prior to GST, life insurance premiums were subject to service tax, which varied based on the age of the policyholder.

• However, with the introduction of GST, a uniform tax rate of 18% is levied on the premiums of term insurance policies. This has resulted in a marginal increase in the premiums for term insurance policies, as the tax component has gone up from the earlier service tax rate to the current GST rate.
• It is important to note that the increased premium due to GST is applicable only to the tax component and not to the entire premium.
• The actual premium paid towards the coverage remains unchanged. Nevertheless, this increase in the tax component of the premium may have an impact on the affordability of term insurance for some policyholders, especially for those with tight budgets.

Impact on Policyholders

• GST has also brought about some positive changes for policyholders of term insurance. Under the GST regime, the tax paid on the premiums of term insurance policies is eligible for input tax credit (ITC).
• This means that insurers can claim credit for the GST paid on various inputs or services used in the process of providing the insurance policy. This has resulted in cost savings for insurers, which could potentially be passed on to policyholders in the form of lower premiums or improved policy features.
• Additionally, GST has simplified the tax structure for term insurance, as it has replaced multiple taxes like service tax, value-added tax (VAT), and central sales tax (CST) with a single tax.
• This has resulted in reduced complexity and improved compliance for insurers, which in turn could benefit policyholders in terms of better service and streamlined processes.

What are the Advantages of GST for Insurance Buyers?

As the world of insurance continues to evolve, so do the regulations and policies that govern it. One such significant change that has had a transformative impact on the insurance industry is the implementation of the Goods and Services Tax (GST) in many countries.

Streamlined Taxation System

One of the primary advantages of GST for insurance buyers is the simplification of the taxation system. Prior to GST, there were multiple taxes, such as service tax, VAT, and central excise, among others, which were levied on different aspects of insurance premiums.

This complex tax structure often led to confusion and increased administrative burden for insurance buyers, insurers, and intermediaries. However, with the implementation of GST, the tax structure has been streamlined, making it easier for insurance buyers to understand and comply with tax regulations.

GST has replaced multiple taxes with a single tax, making it simpler for insurance buyers to calculate and pay their taxes accurately. This has resulted in a more efficient and transparent tax system, reducing the compliance burden for insurance buyers and enhancing their overall experience.

Uniform Tax Treatment

Another advantage of GST for insurance buyers is the uniform tax treatment across different types of insurance policies. Prior to GST, different types of insurance policies were subjected to different tax rates.

For instance, life insurance premiums were subject to service tax, while general insurance premiums were subject to VAT. This non-uniform tax treatment often led to complexities in determining the correct tax rate for various insurance policies.

However, with the implementation of GST, a uniform tax treatment has been introduced for all insurance policies. Under GST, all types of insurance policies are subject to a standard tax rate, which makes it easier for insurance buyers to understand and comply with the tax regulations.

This has eliminated the confusion and complexities associated with the different tax rates for different insurance policies, making it more convenient for insurance buyers to purchase and manage their insurance policies.

Increased Input Tax Credit (ITC)

Input Tax Credit (ITC) is a mechanism that allows businesses to claim credit for the taxes paid on their purchases and offset it against the taxes collected on their sales. GST has significantly increased the scope of ITC, which has resulted in cost savings for insurance buyers.

Prior to GST, insurers were not eligible to claim credit for various taxes paid on their inputs, such as services received from intermediaries, repairs and maintenance of assets, and office supplies, among others.

This often resulted in increased costs for insurers, which were passed on to the insurance buyers in the form of higher premiums.

However, with the implementation of GST, insurers can now claim credit for taxes paid on their inputs, which has resulted in cost savings. This has also made insurance premiums more competitive, as insurers can now reduce their costs by availing ITC, resulting in potential savings for insurance buyers.

This has made insurance policies more affordable and accessible for consumers, contributing to the overall growth of the insurance industry.

Transparency and Compliance

GST has also brought about greater transparency and compliance in the insurance industry. With the implementation of GST, insurers are required to maintain proper records and comply with the GST regulations, including timely filing of returns and payment of taxes.

This has resulted in increased transparency in insurance transactions, as insurers are now required to provide accurate information related to GST in their policies and other communications with insurance buyers.

Conclusion

Though the taxes have increased on life insurance plans, having insurance has become of utmost importance to secure the future of one’s family during emergencies. The GST has raised the taxes by 3% on general insurance plans like health and car. Policyholders should be mindful of the exclusion or inclusion of GST while comparing the prices of the insurance premiums.