At a time when the ministerial panel on GST rationalisation is evaluating ways to make insurance more affordable, the life insurance industry is advocating for the continuation of GST on term insurance plans. Here’s why this issue has sparked a nationwide debate and what it means for consumers.
Why Do Insurers Support GST on Term Plans?
Life insurance companies argue that exempting term plans from GST will lead to the withdrawal of the input tax credit (ITC) for taxes paid on goods and services they use. This, they estimate, adds up to approximately 11% of their costs. Without ITC, insurers warn that the increased operational costs would force them to raise premiums, counteracting the government’s objective of providing affordable insurance products.
To address this, insurers have suggested:
- Maintaining a GST rate of at least 12%, ensuring full ITC benefits to offset costs.
- Allowing zero-rating for term insurance. This means GST would be exempt on the final output but credit for taxes paid on inputs would still be available.
- Reducing the GST rate for insurance commission services if the rate for policies drops below 12%.
The Case for GST Exemption
While some policymakers have proposed exempting GST on term and health insurance plans (particularly for seniors or policies below a specified premium), this comes with its challenges. According to industry experts, GST exemption on renewal premiums for older policies could make operations cumbersome and financially unviable for insurers.
Moreover, the absence of ITC could lead to:
- Increased premiums, eroding affordability.
- Higher administrative costs for insurers.
Consumer Impact: Affordability vs. Cost Management
For consumers, the decision has significant implications:
- If GST is retained: Premiums may remain stable, but consumers indirectly bear the cost of GST.
- If GST is exempted without ITC benefits: Premiums could increase due to higher operational costs passed on by insurers.
Recent Developments
During the GST Council meeting in Jaisalmer, there were discussions on exempting GST for term insurance plans and health policies. However, the decision was deferred as the Insurance Regulatory and Development Authority of India (IRDAI) had not yet submitted its comments. IRDAI is expected to weigh in on this matter soon, potentially influencing the final decision.
Meanwhile, finance ministers are focused on ensuring that any reduction in GST genuinely benefits consumers. Since the anti-profiteering clause is no longer in effect, mechanisms must be in place to pass on lower tax rates without burdening insurers.
Exploring Solutions: Balancing Stakeholder Interests
To balance affordability for consumers and sustainability for insurers, here are potential solutions:
- Zero Rating: This would exempt GST on insurance policies while retaining ITC for insurers, minimising cost increases.
- Tiered GST Rates: Lower GST rates for smaller policies or senior-specific plans, while maintaining higher rates for other policies to offset ITC withdrawal.
- Targeted Exemptions: Introducing exemptions or reduced rates for renewal premiums or policies below a specific threshold.
Final Thoughts
The debate on GST for term insurance highlights the complexities of balancing affordability, operational efficiency, and government revenue. As we await IRDAI’s recommendations and the GST Council’s decision, it is clear that both policymakers and insurers must work collaboratively to ensure a fair outcome that benefits all stakeholders.