Scrapping GST Without ITC Will Push Insurance Prices Higher By 6–10%: Macquarie

A proposed move by the Group of Ministers deliberating on GST reforms, touted as GST 2.0, regarding scrapping the entire 18% tax paid by insurance policyholders, can in fact, increase the premium by 6-10%.

Macquarie explains that the reduction in the Goods and Services Tax on life and health insurance premiums could backfire if not accompanied by input tax credit (ITC) provisions.

The brokerage explained that currently, insurance products attract an 18% GST, which inflates the premium costs for consumers. Reports indicate that the government is considering reducing the rate to 5% or even fully exempting it. However, the brokerage notes that unless insurers can continue to claim ITC, “scrapping GST without ITC is a negative development,” Macquarie said.

“Our channel checks suggest that insurers may need to raise prices by 6–10% to maintain margins, which defeats the purpose of the GST cut,” it said.

The GST Council is expected to deliberate on the proposal during its upcoming meeting on September 18–19.

This matter becomes of importance since the insurance sector itself has grown with a compound annual growth rate of 12%, higher than that of nominal GDP but India's insurance penetration remains low at 3.7% of GDP, which is far below global average of 7%, says Macquarie.

So, a reduction in GST for customer could go a long way in increasing coverage for a larger population, making insurance affordable but without ITC, this reduction in cost cannot be carried out.