Impact of GST on Insurance – life and general.
Under the current laws, there are 2 different slabs of service tax on insurance premiums.
Under the GST regime number of indirect taxes like excise duty, sales tax, service tax and other state and local taxes will subsume into one single GST. This will make the entire process of taxation much simpler and transparent. But, it will add some new dimensions which need to be understood.
Currently, service tax is imposed on services at the rate of 15 per cent (14 per cent basic service tax, 0.50 per cent Swachh Bharat Cess and 0.50 per cent Krishi Kalyan Cess).
Under the GST regime, this service tax will be subsumed into the GST. How much you will pay on insurance premiums will eventually depend on what is the rate of GST decided by the GST Council.
But the Arvind Subramanian Committee has recommended a GST rate of 18 per cent, with differential pricing for specific products. It is likely, therefore, that insurance premiums will attract GST at 18 per cent rather than service tax at 15 per cent. This will increase the cost of insurance by 300 basis points (3 per cent). Impact of GST on life insurance policies Under the current laws, there are 2 different slabs of service tax on insurance premiums.
Currently, term insurance (pure risk) premiums are charged service tax at the existing rate of 15 per cent. Endowment and ULIP premiums are charged service tax at a concessional rate as there is also an investment component in the premiums paid. Hence they are charged service tax at a concessional rate of 3.75 per cent for the first premium and 1.875 per cent for renewal premiums. If the GST rate is set at 18 per cent, then first year premiums will stand modified to 4.50 per cent and renewal premiums at 2.25 per cent.
Remember, ULIP charges are already liable to pay service tax at 15 per cent and that will stand increased to 18 per cent. Lastly, single premium annuity policies currently attract service tax at 1.5 per cent and that will stand modified to 1.8 per cent. Effectively, there will be an increase in life insurance premium costs across the board..
The Model GST Bill does not have any provision for concessional GST in case of ULIPs and endowment policies. That could mean that ULIP and endowment policy holders will also have to pay the peak rate of GST. However, there are representations being made for the same to the government. Impact of GST on non-life insurance premiums Non-life insurance covers include health policies, motor insurance, home insurance etc. These are policies where the premium is towards compensation in the event of a risk.
Being in the nature of contingent term insurance plans, all non-life policies currently attract service tax at the full rate of 15 per cent. With the shift to GST, this tax on insurance premiums will stand revised upwards by 3 per cent to 18 per cent. Here again the costs will go up by 3 per cent .
In a nutshell, there are 4 key points that needs to understand with respect to the implications of GST on insurance premium costs:
1. GST rate is likely to be higher than the current rate of service tax and that will increase the cost of insurance premium
2. It is not yet certain whether the GST Act will offer concessional rate of tax on endowment and ULIP premiums. That will determine what becomes relatively attractive
3. Health and motor insurance costs will also go up.
4. The final clarity on rates and legal issues on GST will be known only after the final rate is declared. Broadly, the cost of insurance is likely to go up post GST.
To conclude that the cost of insurance will go up from the next financial year.
Author : CA Hemant Vastani
Email : [email protected]