The Group of Ministers (GoM) on insurance is in favour of scrapping GST on premium paid for buying individual health and life insurance. This should bring a lot of relief to insurance buyers as currently 18% GST is levied on such policies. However, the benefit of a nil GST may not get passed to consumers, if the insurance companies are not allowed to claim input tax credit on their expenses.
Usually, when a good or service is exempted from GST, ITC is not allowed on inputs for such items.
“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… At the same time, it is important to recognise that 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,” says Rakesh Jain, CEO at Reliance General Insurance.
He says this mismatch increases operational costs and creates financial inefficiencies, limiting the overall benefit of a GST reduction. “Unless this anomaly is addressed, insurers may continue to face pressure on margins even as customers gain from lower premiums,” says Jain.
Experts say the insurance sector is highly regulated and capital-intensive, with significant compliance and operational costs. For sustainable growth, they say, tax reforms need to be complemented with rationalization of processes and policies that ease working capital management.
“We need to watch out for the fact that an exemption results in credit blockages which could impact cost. Insurance industry hopes that key input services of commission and reinsurance also receive an exempt status,” says Mahesh Jaising, Partner and Leader, Indirect Tax, Deloitte India.
Manoj Mishra, partner and tax controversy management leader at Grant Thornton Bharat LLP, feels insurance should be classified as zero-rated or the GST rate be kept at 5% while retaining ITC, ensuring sustainable benefits for both policyholders and providers.
“An outright exemption denies insurers Input Tax Credit (ITC), which could lead to higher base premiums and blunt the intended relief,” he fears.