While customers may be cheering the possibility of a zero GST regime for individuals in the health and life insurance segment, insurance companies are raising red flags. Insurers are citing structural challenges such as the inverted duty structure that could potentially leave them with unutilised input tax credits (ITCs). These ITCs cannot be utilised since there is zero GST on health and life policies to offset the higher GST paid on various input services, industry executives said.
To be sure, lower taxation will directly make insurance more affordable, particularly for middle-class households, rural populations, and small enterprises that often perceive premiums as a financial burden. However, insurers will lose out on ITC, putting pressure on their operational cost.
Rakesh Jain, CEO, Reliance General Insurance, said the industry continues to face certain structural challenges. “A key concern is the inverted duty structure, which 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. This mismatch increases operational costs and creates financial inefficiencies, limiting the overall benefit of a GST reduction,” Jain said.
“Unless this anomaly is addressed, insurers may continue to face pressure on margins even as customers gain from lower premiums,” Jain said. The insurance sector is highly regulated and capital-intensive, with significant compliance and operational costs. For sustainable growth, tax reforms need to be complemented with rationalisation of processes and policies that ease working capital management, he said.
Brijesh Kothary, partner at Khaitan & Co, said the government’s intention behind exploring nil GST on life and health insurance for individuals is clearly to make such products more affordable and widen coverage. However, one must consider the GST mechanics involved. A more pragmatic option would be to subject insurance to a nominal GST rate rather than zero-rating it. This would preserve the ITC flow while still lowering the tax burden on policyholders, Kothary said.
‘Insurance industry favours 5% GST’
“While consumer affordability is crucial, the industry generally favours a reduction in GST (say to 5 per cent) rather than a complete waiver, because: it provides some relief to retail customers and preserves the ITC chain for insurers. It avoids the cascading of embedded costs,” said Gurpal Singh Dhingra, joint managing director, Prudent Insurance Brokers.
Narendra Bharindwal, president, Insurance Brokers Association of India (IBAI) said to avail ITC, there has to be a GST component (even if it is at 5 per cent or lower). “A complete exemption (nil GST) would block ITC, while a reduced rate of 5 per cent would still allow a set-off. Hence, from an industry operations perspective, a reduction in GST rate (say to 5 per cent) may be more practical than a complete exemption,” he said.
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Since nil GST is likely to impact the balance sheets of insurance companies, 5 per cent GST will be ideal from the industry point of view, said the top official of an insurance firm.
He said a complete exemption may increase input costs as ITC will not be available. A calibrated reduction (to 5 per cent) may strike a balance — ensuring affordability for customers while retaining ITC benefits for industry players.
Insurers presently avail ITC on significant backend costs such as insurance commission, re-insurance, technology, customer support and distribution expenses. “If GST on insurance premiums is made nil, this ITC chain breaks and insurers will no longer be able to set off the GST paid on such costs. In effect, the full 18 per cent GST benefit cannot flow to consumers because insurers will be left with unrecoverable costs, which may eventually push up the base premium,” Kothary said.
ITC is a mechanism under the GST system that allows businesses to claim credit for the tax paid on purchases (inputs) used to make taxable supplies (outputs). Put simply, when a company buys goods or services for your business, it pays GST on those purchases (inputs). Later, when it sells the products or services, it collects GST from its customers. The company can reduce the tax it pays on sales by claiming credit for the tax paid on purchases.
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Will insurers hike premiums?
A key question now is whether insurers will pass on the GST relief to policyholders — or hike premiums instead. There’s a real chance insurers may increase premiums to recover losses from their inability to claim input tax credit (ITC), according to an insurance official.
While exemptions can certainly reduce the cost component of premiums, how much of that reduction reaches the end consumer will vary across insurers. In many cases, competition within the industry encourages insurers to transfer a significant portion of benefits to customers, as affordability remains an important consideration for attracting and retaining policyholders, said Hanut Mehta, CEO & co-founder at BimaPay Finsure. Consumer expectations play a role. “If customers actively seek transparent pricing and are aware of the exemption, insurers may feel greater pressure to reflect it in their premium structures. At the same time, some portion of the benefit may be absorbed to balance costs or to maintain margins, depending on market conditions,” Mehta said. “Whether insurers pass on the full benefit or only part of it, our expectation is that exemptions will still make premiums more accessible.”
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