With the Goods & Services Tax (GST) Act being passed in the Lok Sabha and the Rajya Sabha, the next challenge is to understand the implications. To understand the implications of GST one needs to first understand what it will encompass. GST will subsume a variety of indirect taxes like excise duty, sales tax, service tax and other state and local taxes into one single GST. This will make the entire process of taxation much simpler. But, it will add some new dimensions which need to be understood.

Let us assume that Raju, who is an entrepreneur in Kochi, is keen to understand the larger implications of GST for his insurance payments. Raju, being an entrepreneur, allocates an annual sum of nearly Rs.125,000 towards payment of premiums. In fact, he has ensured that considering the uncertainties of his venture, he has life cover, home insurance, car insurance and a family health policy. With the passage of the GST Bill, he has read that the cost of insurance will go up, although he is not sure how. Here is what he needs to know about the implications of GST on his insurance premium payments.

Impacting cost of insurance through service tax

The primary impact of GST will be on service tax. Previously, service tax was imposed on services at the rate of 15% (14% basic service tax, 0.50% Swachh Bharat Cess and 0.50% 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%, with differential pricing for specific products. It is likely, therefore, that insurance premiums will attract GST at 18% rather than service tax at 15%. This will increase the cost of insurance by 300 basis points (3%). The government was also considering a rate of 22% GST. That would have increased the cost of insurance premium by 700% (7%) and make a substantial difference to Raju’s overall insurance cost and may increase his annual insurance bill by nearly Rs.9000/-.

Impact of GST on life insurance policies

There is something unique one need to understand about life insurance because the term policies are pure risk covers which are different in the imposition of taxes compared to the endowment and ULIP policies. Before understanding the implications of GST on insurance, you need to understand that under the current laws, there were 2 different slabs of service tax on insurance premiums. Currently, term insurance (pure risk) premiums were charged service tax at the existing rate of 15%. With the imposition of GST, assuming that the rate is set at 22%, there will almost be a doubling of your service tax paid on your term insurance premium. 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% for the 1st premium and 1.875% for renewal premiums. If the GST rate is set at 22%, then first year premiums will stand modified to 5.50% and renewal premiums at 2.75%. Remember, ULIP charges are already liable to pay service tax at 15% and that will stand increased to 22%. Lastly, single premium annuity policies currently attract service tax at 1.5% and that will stand modified to 2.2%. Effectively, there will be an increase in life insurance premium costs across the board. There is another area of worry for Raghav. 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.

How GST will impact 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%. With the shift to GST, this tax on insurance premiums will stand revised upwards by 3% to 18%. For the insured, the message is clear. In case of health cover stick to family floaters and try to compare across service providers for the lowest premium health cover. The same applies to motor insurance cover also. Here again the costs will go up by 3% and the buyer of insurance needs to closely monitor the depreciated insurance value of his car to reduce his premium outgo.

There will also be some procedural hassles of GST in insurance

There are some open grey areas pertaining to GST on insurance in the post April 2017 period. Where the GST is to be paid is an open area for debate. For example, if the insurance company, agent and the buyer are in different states then the point of confusion is in which state should the GST be booked and paid? Of course, these are minor technical issues that can be sorted out.