Impact of GST on Insurance Sector, GST Impact on Insurance Companies. Indian tax system is going to be encountered with one of the biggest tax reforms, as GST (Goods and Services Tax) will get rolled-out on July1st, 2017. With others, service industry is also under its gambit, one of which is financial services. GST council has set a rate of 18% on financial services industry, which is going to make insurance sector a bit expensive. Being said that, both general and life insurance premiums will climb up by 3% due to increase in tax rate from previous 15% to 18%. All policy holders can expect official notification from their Insured organisation in this regard to make it liable on customers at large.
Impact of GST on Insurance Sector
We can figure it out that ultimate impact is on consumers, so in insurance sector they are policy holders who have to bear this marginal hike of 3%. Habitually, life insurance policies represent two elements, risk cover and savings, so policyholders pay service tax on the risk element of the premium and not on savings, as investment (from savings) element are still kept out of the service tax scope. Let’s analyse its impact on products offers by insurance industry
Term plan offers pure risk protection to the nominee of deceased, from death of the insured. Sum assured under term plan protection is paid to the nominee if insured dies under the contracted term period with Insurer. The premium element of the term plan contains majority of the risk cover. As already discussed, existing plans available in the market before July1st, 2017 will attract levy of 15% service tax as against prospective GST rate that will take this up to 18% by trailing increase of 3%.
These plans are in orthodox in nature offers both death and maturity benefits, whichever happens first. As per existing laws, endowment plan takes a levy of 3.75% service tax on the premium in the first year of the policy and post GST implementation it will raise to 4.5% in first year. From second year onwards as per existing laws, endowment plans attracts levy of 1.875% service tax and post GST implementation it will raise to 2.25% for second year onwards.
ULIP stands for Unit Linked Insurance Plan (ULIPs) they too offer twofold benefits of insurance and investments. As per existing laws, ULIP takes a levy of 3.5% service tax on the protection component of ULIP in the first year of the policy and post GST implementation it will raise to 4.5% in first year. From second year onwards as per existing laws, ULIP attracts levy of 1.75% service tax and post GST implementation it will raise to 2.25% from second year onwards.
Health, Motor & Other Insurance: At present existing service tax is 15%, post GST implementation it will raise to 18%, in turn increasing the cost of insurance.
Below is the list of Service Tax Exemptions to be continued in GST as concluded by GST Council
Services of life insurance business provided by way of annuity under the National Pension System regulated by Pension Fund Regulatory and Development Authority of India (PFRDA) under the Pension Fund Regulatory And Development Authority Act, 2013 (23 of 2013).
Services of life insurance business provided or agreed to be provided by the Army, Naval and Air Force Group Insurance Funds to members of the Army, Navy and Air Force, respectively, under the Group Insurance Schemes of the Central Government.
Services by Employees’ State Insurance Corporation to persons governed under the Employees’ Insurance Act, 1948 (34 of 1948).
Services provided by Insurance Regulatory and Development Authority of India (IRDA) to insurers under the Insurance Regulatory and Development Authority of India Act, 1999 (41 of 1999).
Services of general insurance business provided under following schemes –
- (a) Hut Insurance Scheme;
- (b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as Integrated Rural Development Programme);
- (c) Scheme for Insurance of Tribals;
- (d) Janata Personal Accident Policy and Gramin Accident Policy;
- (e) Group Personal Accident Policy for Self-Employed Women;
- (f) Agricultural Pumpset and Failed Well Insurance;
- (g) Premia collected on export credit insurance;
- (h) Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme, approved by the Government of India and implemented by the Ministry of Agriculture;
- (i) Jan Arogya Bima Policy;
- (j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);
- (k) Pilot Scheme on Seed Crop Insurance;
- (l) Central Sector Scheme on Cattle Insurance;
- (m) Universal Health Insurance Scheme;
- (n) Rashtriya Swasthya Bima Yojana; or
- (o) Coconut Palm Insurance Scheme;
- (p) Pradhan Mantri Suraksha BimaYojna;
- (q) Niramaya Health Insurance Scheme implemented by Trust constituted under the provisions of the National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999 (44 of 1999); or
- (r) Any other insurance scheme of the State Government as may be notified by Government of India on the recommendation of GSTC.
Services of life insurance business provided under following schemes –
- (a) Janashree Bima Yojana (JBY); or
- (b) Aam Aadmi Bima Yojana (AABY);
- (c) Life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum amount of cover of fifty thousand rupees;
- (d) Varishtha Pension BimaYojana;
- (e) Pradhan Mantri Jeevan Jyoti BimaYojana;
- (f) Pradhan Mantri Jan Dhan Yojana;
- (g) Pradhan Mantri Vaya Vandan Yojana; and
- (h) Any other insurance scheme of the State Government as may be notified by Government of India on the recommendation of GSTC.
Leading to a hike in tax rates, we may encounter a strong competition for the premium prices within insurance industry and in turn further improvement in services. But most importantly, in today’s raging world insurance is one of the most significant step to tread in specifically for sole bread earner, that it is not a big deal to shell out few thousand bucks against this marginal hike of 3%.
Written By: Amit Khiyani (CA, LCS, IFRS, BCom)
Myself Amit Khiyani an qualified CA, LCS, Diploma holder in IFRS with BCom graduate having experience of Financial Reporting, Financial Accounting, Financial Analysis, USGAAP, IFRS, and Internal Audit & Risk Management across diverse sectors, exploring Finance world by reaching and accessing all streams through passion of writing.
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