The Central Board of Indirect Taxes and Customs (CBIC) recently issued Circular No. 214/8/2024-GST, dated 26th June 2024, to clarify the treatment of the portion of life insurance premiums that are not included in taxable value under the GST law. This clarification is crucial for life insurance companies and policyholders to understand their GST obligations better. Let’s break down the key points of this circular in simple terms.
What is the Issue?
Life insurance companies provide policies that include both a risk cover (insurance) and an investment component. When calculating GST, the premium amount allocated for investment or savings is not included in the taxable value. This circular addresses whether the portion of the premium excluded from taxable value should be treated as exempt or non-taxable supply and whether input tax credit (ITC) should be reversed for that amount.
Key Clarifications
- Definition of Life Insurance Business: A life insurance business includes policies that cover risk and may also have an investment component. This is defined under Section 2(11) of the Insurance Act of 1938 and includes policies such as unit-linked insurance plans (ULIPs).
- Taxable Value Calculation: According to Rule 32(4) of the CGST Rules, the taxable value of life insurance services is determined by deducting the investment portion from the total premium. Only the remaining portion, which is for risk cover, is considered for GST purposes.
- What is Exempt Supply? Under Section 2(47) of the CGST Act, an exempt supply includes:
- Supplies attracting a nil rate of tax.
- Supplies wholly exempt from tax under specific notifications.
- Non-taxable supplies (goods or services not subject to GST).
- Non-Taxable Supply: As per Section 2(78) of the CGST Act, a non-taxable supply is not leviable to tax under the GST law.
Clarification on Input Tax Credit Reversal
The central question is whether the premium amount excluded from taxable value needs ITC reversal.
- Life Insurance Services are Taxable: The service of providing life insurance cover is taxable under GST. No notification exempts any portion of these services from GST.
- Not Exempt or Non-Taxable: The portion of the premium not included in the taxable value (investment part) is neither nil-rated nor exempt. It also does not qualify as a non-taxable supply because the service itself is taxable.
- ITC Reversal Not Required: Since the portion of the premium excluded from taxable value does not fall under exempt or non-taxable supplies, there is no need to reverse ITC under Rule 42 or Rule 43 of the CGST Rules.
Conclusion
In simple terms, if you are paying a life insurance premium that includes an investment part, only the portion related to insurance risk cover is taxable under GST. The investment portion is excluded from GST calculation but it does not mean it is exempt or non-taxable. Therefore, life insurance companies do not need to reverse ITC on this excluded amount.
This clarification simplifies compliance for life insurance companies and ensures that they follow a consistent approach in handling GST on life insurance premiums.