Profit Explains: Why GST Cuts On Insurance Without Input Tax Credit Will Not Bring Down Premiums
Impact of the rate rationalisation on the insurance industry depends on whether the rate cut is implemented with or without the input tax credit.
Prime Minister Narendra Modi had announced a two-slab GST structure that could help rev up consumption and streamline indirect taxation, in a move that could be the most significant overhaul of the Goods and Services Tax regime since its rollout.
Under the proposal, 99% of items currently taxed at 12% may shift to the 5% slab, substantially reducing the tax burden on a wide range of goods and services. Impact of the rate rationalisation on the insurance industry depends on whether the rate cut is implemented with or without the input tax credit.
Scenario 1:
5% slab without Input Tax Credit: Limited benefit
Scenario 2:
5% slab with ITC without lower GST on input goods and services: Limited benefit
Scenario 3:
5% slab with ITC with lower GST on input goods and services: Full benefit
If a GST rate cut to 5% is implemented with ITC and GST rates on input goods and services lowered to align with the end GST rate of 5%, then this would be the most desired scenario and is likely to result in price of protection and health insurance reducing in line with the rate of headline GST rate cut, said Avinash Singh, senior research analyst at Emkay.
Rakesh Jain, CEO at Reliance General Insurance also said that reducing GST on insurance premiums is a progressive and customer-centric step that will catalyse deeper penetration of insurance in India. However, to unlock the full potential of this reform, policymakers will have to also address structural inefficiencies such as the inverted duty structure.
For instance, an insurance company accepting Rs 100 premium for Term Life, Motor OD, or Health collects Rs 18 as GST from the customer, said Singh. The insurance company pays GST on various services — commissions and other non-salary operating expenses, cost of goods or labour costs. Hence in this process, insurers—on case-by-case basis—end up paying Rs10-12 as GST on the goods and services used and so adjust this amount from the Rs 18 GST collected from the customer and then deposit the balance Rs 6-8 with the government, explained Singh.
As such, unless GST rates on these input goods and services are lowered, the cutting of rate to 5% on the final premium along with the Input Tax Credit will create an inverted GST structure. If the company has already paid Rs 10 GST on inputs, then anything lower than such collection on a premium would mean the insurer will need to adjust the base premium upward to recoup this excess GST paid; hence, despite the GST rate cut from 18% to 5%, the cost to customer will not increase to Rs 105 (100+5) from Rs 118 (100+18), but to Rs 110.25 (105+5.25). And if the ITC is not allowed, then the price rises to Rs 115.5 (100+10+5.5) – barely any visible change, explained Singh.
The inverted duty structure leads to accumulation of unutilised input tax credits, as insurers are unable to offset taxes paid on many input services that attract higher GST rates, said Jain. This mismatch increases operational costs and creates financial inefficiencies, limiting the overall benefit of a GST reduction. Unless this anomaly is addressed, insurers may continue to face pressure on margins even as customers gain from lower premiums. The insurance sector is highly regulated and capital-intensive, with significant compliance and operational costs.
