GST Relief Could Cut Insurance Premiums By Up To 15%, Depending on Credit Claims

Amidst the recommendation by the group of ministers (GoM) to exempt GST on health and life insurance premiums, the biggest question for policyholders now is how much would the premium fall if the proposal is implemented.

Depending on the implementation of Input Tax Credit, the premiums on health and life insurance policies are likely to decline by up to 15%.

In a significant relief proposal for individual policyholders, the group of ministers on GST reform is set to recommend a complete exemption of goods and services tax on health and life insurance premiums under the revamped regime expected to roll out around Diwali.

Following this, a fall in premiums is inevitable. The extent of price reduction will be a function of what the final GST rate is and what the mechanism of its implementation is with respect to the Input Tax Credit, said Avinash Singh, analyst at Emkay.

For the products falling under the ‘Exempt’ category, the GST Input Tax Credit will not be available, Singh explained. The ‘Zero Rated’ category of supplies currently allows for ITC and GST refund; however, that is only for exports or supplies to SEZ units. As a result of this, insurers will need to increase the base prices to manage the GST ITC loss.

For instance, if a health insurance company is currently collecting Rs 100 as premium and Rs 18 as GST from the customer and is incurring Rs 35 as expense on commissions and other services and hence has paid Rs 6.3 (18% on Rs 35) as GST, then the insurer will deduct this Rs 6.3 from the collected GST and deposit the balance Rs 11.7 with the government. With the premium now falling under the ‘exempt’ category, the insurer will increase the base price to Rs 106.3 to cover for the ITC loss, Singh explained.

Narendra Kumar Bharindwal, president at Insurance Brokers Association of India, also said that while premiums will definitely drop immediately post the GST relief, the issue of adjusting input tax credit might not be as much of a challenge for general insurance companies which offer a wide portfolio of products and services and might not be affected as much.

Health insurance companies will have to go back to the drawing board and recalibrate prices depending on costing given that they are unlikely to now receive input tax credit, he said. Given the predicament around input tax credit, parts of the industry also believes that levying GST at 5% might benefit the industry, permitting them to continue to avail input tax credit.

Insurers are also waiting for more clarity on whether the entire individual life insurance basket (including savings and annuity) or just the retail term life will be exempted from GST, said Singh.

Demand for health and term insurance will definitely see a jump, Bharindwal said. Premiums have seen a sharp rise especially post Covid, given that healthcare costs too have gone up, he added.